A winter of price discontent becomes a season of uncertainty

As Texas and the United States approached the fourth quarter of 2022, there was every reason to believe that power consumers were facing a winter of discontent over prices. The country had just sweated through one of the hottest summers on record, demand was surging while output was declining, and domestically produced liquefied natural gas was being shipped to Europe as Russia’s invasion of Ukraine disrupted global energy markets. So it was no surprise that conventional wisdom concluded prices that were already surging in 2022 would show no sign of letting up entering 2023.

So much for conventional wisdom.

Benchmark Henry Hub natural gas prices – a major driver of electricity costs, especially in Texas– have plunged. Storage levels in both the United States and Europe have grown and now provide a comfortable supply cushion. Despite a December freeze, moderate winter temperatures – January got off to its warmest start in almost 15 years, analysts said – have kept demand in check.

Does that mean the record natural gas price swings that defined 2022 have evaporated? Not at all. “It’s looking really volatile here to start the year,” said one analyst. And there are expectations that power prices in Texas may climb even higher this winter. So the state’s businesses and organizations should consider collaborating with an energy procurement partner to help them navigate the uncertainty, save money, and keep their operations productive and efficient.

Record high gas prices marked 2022

The wholesale Henry Hub natural gas spot price averaged about $6.45 per million British thermal units last year, according to the Energy Information Administration, the highest annual mark since 2008 and 53 percent higher than in 2021. On a daily basis, prices were all over the map, ranging from a peak in August of $9.85 per million British thermal units to a low of $3.46 per million Btu in November. But they started creeping up in December as heating demands grew.

The price performance was both consistent with and in contrast to EIA’s previous outlook. In early 2022, the agency forecast that Henry Hub natural gas prices would average about $9 per million British thermal units in the fourth quarter of 2022 before retreating to roughly $6 in 2023 as production recovered. It scaled back those estimates in October, to about $6 per Btu in the fourth quarter of 2022 and holding that level in Q1 of 2023. Still, that was sharply higher than the $3.32/MMBtu in 2021 and $1.86/MMBtu in 2020.

The higher-price expectations weren’t without reason. Prices had begun to creep higher in early 2021, when a brutal winter storm battered Texas and Oklahoma, causing a spike in February. They kept rising through October as the economy strengthened and caused an increase in demand, which hit an annual high of 2.97 billion cubic feet per day. The cold weather extended into spring 2022, pushing prices even higher, leading to below-normal injections of gas into storage in advance of the approaching heating season, and gas already in storage had been withdrawn to meet winter demand. Drillers were raising production, but available supply was still lagging.

Demand was showing no signed of abating, either. In January 2023, EIA said it expected consumption of natural gas settle at an average of 88.7 bcf/d EIA last year – a new high and up 6 percent from 2021 – and that power sector usage would average 33.3 bcf/d, another record and 8 percent over 2021. Meanwhile, the agency noted that in 2022, liquified natural gas exports continued to climb and storage inventories were at historic lows.

High prices don’t materialize, but volatility still reigns

But as the United States entered a new year, the market had begun to shift dramatically. From mid-December 2022 to mid-January 2023, prices plunged 48 percent and, according to Rystad Energy, demand could hit record lows if abnormally high winter temperatures continue. On top of that, production is poised to outstrip demand: EIA projected natural gas output will grow 2.4 percent this year, to a daily a record daily average of 100.3 billion cubic feet per day, while demand remains basically flat. Others, including East Daley Analytics and RBN Energy, forecast an even higher output increase.

The falling costs of natural gas, combined in part with the expansion of new renewable energy, were projected to drop wholesale U.S power prices by 10 to 15 percent this year – though customers likely won’t see benefits in 2023. On top of that, storage, which had fallen to 12 to 13 percent below the trailing five-year average, was on the upswing in both the United States and Europe. In the EU, it was at 83 percent of capacity, up sharply from the year-ago level of 51 percent. In the United States, inventories rose by 11 billion cubic feet in mid-January – the Wall Street Journal called that “unheard of” – bringing domestic stockpiles to just 1.4 percent under the five-year average and “erasing any doubt that there will be enough of the fuel to get through the winter.”

Price volatility is not likely to abate in 2023, but isn’t expected to reach the record levels of last year. “It’s looking really volatile here to start the year,” said Steve Blair of Marex North America. “We have a lot of factors at play – production, LNG – but ultimately weather will rule.” He added: “If we get more Arctic blasts, the direction of prices could change quickly. If we don’t, and production holds up, we could see new tests to the downside.” For its part, EIA forecast Henry Hub prices will rise about $5 in late January and stay around there for the last three quarters of the year behind falling temperatures and the restart of operations at the Freeport LNG terminal. But it, too, hedged all bets, saying there is a possibility of lower prices.

State of Play In Texas

Despite the plunging cost of natural gas, power prices in Texas are high and, said an economist with the Federal Reserve Bank of Dallas, could go even higher this winter. Part of this is due to the state’s reliance on gas-fired power – 44 percent of generation compared with 37 percent nationally. Exports are expected to jump with the start of the Freeport facility, and three other Gulf Coast terminals are being built. “Those exports,” the Fed’s Jesse Thompson said, “are likely to keep pressuring higher the amount Texans will pay for heat and power through the winter.”

Additionally, there are the ongoing effects of Winter Storm Uri, which knocked out electricity for 5.2 million homes and businesses in 2021 – the large majority of them in Texas. The state’s power customers are still picking up the cost for the grid’s collapse after the legislature approved about $7 billion in ratepayer-backed bonds to deal with the financial repercussions of the disaster.

Also related to the storm, the Electric Reliability Council of Texas has since been managing grid operations more conservatively. ERCOT now wants plants to be online and available when needed. That translates to paying generators a set price to operate, no matter what the conditions. The result? “Conservative operations add costs,” a top energy lawyer told The Texas Tribune.

Your Market Ally

It goes without saying that in a market like this, where the only certainty is uncertainty, businesses and organizations can use an ally. Albireo Energy is your partner in not only managing price and supply volatility, but also in finding opportunities that others might not see.

Albireo Energy is the largest independent smart buildings provider in the United States, and its energy procurement division is a Top 10 utility management firm in its own right, handling over 30,000 commercial and industrial accounts.

We have helped customers country get deals that have them paying less than half of the local utility default service rates, and have helped secure those rates for the longer term. Thousands of businesses have enjoyed lower energy costs by enrolling their electric and natural gas accounts with us. We group these accounts together into large energy aggregations, and those businesses get the same purchasing power as major energy users. Enrolling is simple and effective and provides a long-term solution for your energy purchasing while delivering the peace of mind that comes with knowing your energy expenses are being professionally managed.

For larger businesses, Albireo’s proprietary reverse auction software, supplier management portal, and market-leading supplier network drive sophisticated and proven results. That’s why heavy users such as data centers and blue chip global brands trust Albireo to help them navigate the complexity and risk of energy purchasing.

Any organization that is feeling the pain of high energy bills, or is concerned about where prices will go next, should reach out to Albireo Energy to see what our business-class service can achieve for them. Through intelligent buying patterns, you can enjoy the advantages of structured and longer-term purchases. And even if you are locked into good rates, you can still benefit from an account review. Even beyond matters of rates, Albireo employs thousands of professionals who can help your buildings reduce usage and improve comfort and efficiency through leading-edge technology.

If any conclusion can be drawn from the market today it’s this: No one really knows what will happen next, and price volatility is not going away. But you can still be prepared. Albireo Energy is here to help you do it.

References
Dallas Morning News – Electric bills are likely to keep climbing, Dallas Fed economist says
Energy Information Administration – Average Cost of wholesale U.S. natural gas in 20922 highest since 2008
Energy Information Administration – U.S. natural gas consumption forecast to increase in all sectors in 2022
Energy Information Administration – Short Term Energy Outlook
Energy Information Administration – Natural Gas Weekly Update
Financial Post – More oil and gas volatility in 2023 to keep producers focused on shareholder returns
Natural Gas Intelligence – Average Henry Hub Natural Gas Spot Price Shoots to 14-Year High in 2022
Natural Gas Intelligence – Volatility Laces 223 Natural Gas Price Outlook Amid Robust Production, Demand Uncertainty
Natural Gas Intelligence – Henry Hub Natural Gas in Q$ Likely to Average $9, with Brent $98, EIA Says
Natural Gas Intelligence – EIA slashes Natural Gas Price Forecast, But Potential Remains for Winter Spikes
Natural Gas Intelligence – Henry Hub Natural Gas in 4Q Likely to Average $9, with Brent $98, Says EIA
Reuters – U..S. natgas price volatility hit record highs in 2022
Reuters – U.S. natgas output, demand hit record highs in 2022
Texas Tribune – Texans face skyrocketing home energy bills as the state exports more natural gas than ever
Wall Street Journal – Made in the U.S.A.: Natural gas prices
Wall Street Journal – It’s Basically Spring for the Natural Gas Market