First and foremost, we want to express our concern for the safety and well-being of all the people of Texas. We sincerely hope that we never again see any energy market reach the point that Texas did last week. This commentary will attempt to unpack some of the impacts that we have seen so far. There will certainly be more fallout to come, but this is a brief analysis of where energy markets stand as of now.
Before we dive too deep, it is critically important to articulate the difference between a futures price and a spot price. A futures price is what we almost always discuss in this space. It is the constantly moving, traded price for a given month in the future. During February 2021, the earliest or prompt futures month is the March 2021 futures contract.
To be very clear, the futures market is NOT the pricing that went out of control last week. The headlines were rightfully reflective of spot prices, the amount one must pay for a specific hour for electric (or for a specific day for natural gas). There can be a different spot prices each hour throughout the day per electric region. Similarly, there is a different spot price for each day in the month for a given natural gas delivery point.
Last week, spot prices in the Texas electric market were mandated to be $9,000 per megawatt hour. With extreme cold causing record wintertime demand and that same cold causing power generation facilities (wind, natural gas, coal, and others) to shut down, demand outpaced supply to the point that blackouts were the only remaining alternative. Usually spot prices trade in the $25 to $35 per megawatt hour range but are automatically set at $9,000 in Texas for every hour that a forced blackout is in place. This means literally millions and billions of additional energy charges for electricity in Texas last week alone. There are still many unknowns and clearly, many urgent meetings underway. There will be fallout, but it’s too soon to predict any outcomes.
Spot prices in Texas were not the only markets that went crazy. Natural gas prices in Oklahoma hit all-time records, at one-point trading over $300 per dekatherm (normal prices are typically in the $2 to $3 range). While many spot price records were broken last week, spot prices surged in many electric and gas markets as they typically do when extreme weather hits. Those areas are more accustomed to seeing these surges and have enough power generation and natural gas storage available to avoid the doomsday Texas scenario.
From a futures market perspective, the uneasiness in energy markets was most definitely felt but not nearly to the same extreme as the spot market. The prompt month March 2021 contract surged 21.7 cents on Tuesday, February 16th and an additional 9 cents on February 17th. President’s Day on February 15th was a bank holiday, which meant no official settlement and helped add to the dramatic rise on Tuesday. At its peak, the March 2021 contract traded north of $3.30 on Wednesday, nearly 40 cents higher than where it had settled the prior week. As Thursday materialized, the prompt month again tested the $3.30 level before retreating and finishing the day down 13.7 cents. A quiet Friday left the prompt month up 15.7 cents for the week at $3.069.
As you might suspect, the futures market was not nearly as volatile in the further out months. Winter 2021-2022 added just over 7 cents, but all winters beyond that barely moved throughout the week. This would be expected. The extreme cold will certainly mean more natural gas withdrawals than usual in February. This also means a lower finishing level for the end of winter 2020-2021 and a lower starting point for winter 2021-2022. That lower starting point for next winter is the reason for the mild price increase.
From a customer’s perspective, there are a lot of pieces to consider. There are already headlines of Texas customers being charged thousands of dollars more than usual on their February bills. Most have not yet received their bills, so those headlines are only beginning. But it is important to realize that many will not be impacted at all. Whether you are on a fixed rate or a variable index-based rate is the most critical question. If the fixed rate guarantees all usage at the same price, then you should expect to be unimpacted by the higher spot prices. If your supply contract allows for any price adjustments based on market conditions, then you should monitor your bills very closely.
This advice extends beyond Texas. The unfortunate events of last week should serve as a critical reminder for end users everywhere to understand their natural gas and electricity contracts and to ensure that they are protected from extreme price movements and unforeseen weather events.
Download a PDF version of this week’s Market Commentary.