Energy Market Update: September 2024 Recap

After a cool start, September brought us several weeks of above-normal temperatures, and the electricity market saw prices increase as expected. The 12-month electricity price at the start of the month was ~$39.60/MWh in Ohio and $40.70/MWh at the end of the month. In PA, it jumped from ~$43.60/MWh to $44.60. Interestingly, though, the 36-month strips came down in both states – a decrease of ~$2.50/MWh in Ohio and ~$2.90/MWh in PA, leaving the longer-term prices trading at similar prices to the shorter terms. The higher projected capacity prices will impact the end-user’s prices and are not included in the rates mentioned here.However, the underlying market fundamentals continue to suggest that rising energy prices are a distinct possibility. Natural gas is a major feedstock for electricity generation and a major source of volatility in electricity prices. We continue to see market fundamentals that are worrisome for energy buyers:

• The number of US gas drilling rigs stayed flat throughout the month and is still lower than pre-COVID.
• Natural Gas storage injection levels are consistently smaller than historical injections for the same week in previous years and are pulling the amount of gas in storage down from ~360 bcf above average at the start of the month to ~230 bcf above average at the end of the month.
• NOAA is broadly projecting a slightly warmer- and wetter-than-normal winter – if these projections prove out, we should start the spring with enough gas in storage to avoid price spikes. Should enough cold weather occur or natural gas production drop, price volatility could become an issue.

The wholesale energy markets watch these factors, and changes can push prices up or down daily. Based on where we stand now, we recommend evaluating these strategies:

• If you haven’t already, lock in your energy price through May 2025 as soon as practical.
• Continue to avoid longer-term contracts, especially longer than May 2026 – energy prices are flattening, but in our impression are still overpriced.
• Invest in a plan to reduce your peak demand and overall energy consumption if you haven’t already. Price volatility is a simple fact of life in the energy industry, and efficiency can bear real financial benefits.

Your to-do list for September is very similar to your August list:

1. Make sure you have a good relationship with a trusted energy advisor – you will want someone with experience and expertise watching the markets to help you pick the best time to buy.
2. As you budget for 2025 and beyond, expect prices to be higher than you pay now. Any drop in natural gas storage levels will drive price increases for both gas and electricity, and higher capacity prices after May 2025 are a virtual certainty.

Watch August 2024 Energy Market Update Recap ->

Petroleum & Refined Products

Since the seasonal summer peak in July, the overall trend of the last few months has been down with bearish price action, with short-lived rallies in between. We saw new lows for the year (and lows not seen since 2021, before the Russia-Ukraine war) as bearish data continued to roll in. Mid-September saw the first FOMC Fed Funds interest rate cut since 2020. Shortly after that, crude and refined products were put at a bottom, while risk assets like equities steadied in the face of the easing policy. Options volatility skew data also saw some of the most bearish market positioning seen in years as bearish calls continued to mount from some of the industry’s most oversized energy desks, citing 2025 and forward demand would be in a deficit to global supply production. Further bearish calls came in as OPEC signaled they were gradually ready to increase production by the end of the year. This was not welcome news for bulls in a physical oil market perceived to be in supply surplus.

Furthermore, it’s a presidential election year, which may partly coincide with the risk of positioning as the contrast between both candidates could not be more disparate. China’s economy was severely declining, while energy has recently been buoyed by Middle East geopolitics and unrest. Tensions have since reignited to a tipping point not seen since Iran fired missiles on Israel in April. Overall market positioning has been net short vs. April, causing significant short covering and a sharp 10% move higher. If Iran’s energy infrastructure is damaged or refineries are eliminated, we can expect significantly higher volatility not seen since the beginning of the Russian-Ukraine war.

Action advice – We have seen a very sharp rally where heating oil and diesel rallied over 30cpg off multi-year lows. We feel that for a continued move higher from here, further escalation in the Middle East that takes supply offline needs to be escalated. In the future, we expect resistance in the $2.37 area. If tensions cool and the rally fades, we could expect a trade back down to the $2.15-2.20 range. If unrest continues and HO futures rally above $2.37-2.40, we expect a return to $2.50-2.75 rather quickly. We suggest taking advantage of the lower prices as we enter the heating season and will see increased demand for distillates.

Want to help your business navigate the current market? Get started with your Shipley Energy Advisor today!

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