Energy Outlook – Summer 2023

As summer temperatures start to climb, the energy markets are gearing up for the increase in demand, caused largely by increased air conditioning load. Weather is always a factor in energy pricing, and we’ll also take a quick look at current market fundamentals and the transition to renewables with an eye on summer demand.

Weather

NOAA’s national forecast calls for higher chances of above-average temperatures for the West, South and up the East Coast this summer.  Precipitation also plays a role as higher humidity levels keep temperatures higher overnight, further increasing cooling demand, while drought conditions reduce the availability of hydropower for generating electricity.  The eastern half of the country can expect a higher chance of increased rainfall while much of the West should see average levels of precipitation after many areas saw record snowfalls this past winter, further improving reservoir water levels.

June also marks the beginning of the North American hurricane season.  Researchers at Colorado State University (CSU) anticipate a slightly below-average Atlantic hurricane season, which runs until November 30.  CSU predicts 13 named storms will form in the Atlantic, with six expected to become hurricanes.  Just a few years ago, the threat of hurricanes in the Gulf of Mexico would send pricing soaring higher but natural gas production in the Gulf has been steadily falling for the last 15 years due to the incredible growth of shale gas.  Nearly 80% of US dry production is now done inland and recent hurricanes in the region have actually pushed pricing lower due to power outages, heavy rains and by shutting in LNG shipments. 

Market Fundamentals

From a market perspective, near-term natural gas pricing has fallen significantly as compared to last year, a period of some of the highest price volatility in our 27-year history.  Gas storage inventories have increased as producers responded to 2022’s high prices with increased drilling and production.  Strong production, combined with a very warm winter both here and abroad, caused Henry Hub spot pricing to recently hit a two-year low, before moving higher, recently trading in the $2.30 – $2.45 range, perhaps indicating a market floor around $2.00/MMBtu for the near term.  Contract pricing for delivery beyond early 2024 is significantly higher in the low $4 range.  Benchmark electricity pricing is also down from last year but has recently leveled off, with shorter terms trading lower than the outer years in most markets.

The Energy Transition and Reliability

Summer heat often puts the highest strain of the year on the electricity grid.  Concerns over reliability and resilience are growing as power plants, particularly coal-fired plants, are retiring faster than they can be replaced.  Upgrading the transmission network, extreme weather and cyber and physical security threats all require major changes to the U.S. grid, according to both Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC).  Capacity markets were designed to let market dynamics solve part of the problem by attracting new generation, but state-subsidized renewable energy further complicates the issue and introduces intermittent power sources into the equation.

The Bottom Line

Energy costs for this summer are significantly lower than last year.  Extended, above-average heat can quickly impact pricing and further raise concerns over grid reliability due to fewer power generation sources, but the energy markets look to be in decent shape heading into the summer months.  Both natural gas and electricity are currently trading at some of the lowest prices we’ve seen in a few years, making this a good time to consider layering in additional months or years at a fixed price and taking at least some risk of higher prices off the table.

Next Steps

Connect with our team, either here via the chat, by way of our contact form, or by calling 800.520.6685. We’ll start with a complimentary analysis of your energy bills, coupled with an exploratory conversation around your energy needs, budgetary goals, and overall energy management strategy.