Commodities 2022: fundamentals could smooth the roller coaster of electricity markets
Most futures traders point to a tame second half
Milder weather, pandemic may reduce loads
Supply constraints can reduce the ability to ‘catch up’
While the roller coaster that America’s power markets have endured since the novel coronavirus pandemic set in in March 2020 are not over, futures traders can predict hills and valleys foreshortening by the end of this year. 2022.
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However, supply chain issues for materials like steel and coal can tighten electricity markets more than futures traders realize.
The 2022 peak forward curves for four US hubs as of December 22 show significantly smaller price ranges compared to the average monthly marginal peak prices since the start of the year in 2021. The exception is California where drought, forest fires, extreme weather conditions and the high penetration of renewables pose a higher risk.
Additionally, in all cases except California, the peaks in the front are advanced through January and February, reflecting lingering concerns about the “black swan” event of the February 2021 winter storm. .
Pandemic, weather impacts
However, the acceleration of new coronavirus infections could dampen economic activity in the first quarter. According to Worldometers.info, which collects data from public health agencies, the seven-day moving average of new COVID-19 cases in the United States rose to 171,573 as of December 22, above the recent peak of 167 589 September 2. the last time the seven-day moving average exceeded the Dec. 22 figure was Jan. 26 at 172,377.
The Seattle Institute for Health Metrics and Evaluation predicts that the daily infection rate in the United States could exceed 2.7 million by the end of January, including those who never get tested, if the use of a face mask. protection remains well below 80%. For comparison, the highest daily infection rate for IHME was 504,275 on December 28, 2020.
Another factor that can weaken the demand for electricity is the weather. The National Weather Service forecast for December 16 for January, February and March indicates the likelihood of near-normal or above-normal temperatures for all except the Northern Rockies and Pacific Northwest, where the probability of temperatures below normal ranges from 33% to 50%.
The US Energy Information Administration predicts that heating degree days in January, February and March will be down about 1.5% from 2021 levels. For the year, S&P Global Platts Analytics predicts that levels The average load in the lower 48 states in 2022 will be about 0.5% lower than 2021 levels.
However, in a special report from 2022, Platts Analytics said: “After 2021 focused on recovering energy demand, 2022 will focus on being able to catch up on supply.”
The ability to “catch up” depends on supply and price constraints. Steel is required to build electrical infrastructure, and prices for U.S. flat-rolled steel products have risen sharply in the first three quarters of 2021, with domestic hot-rolled coils, a benchmark for US prices. steel, having jumped 94% year-to-date to an all-time high. of $ 1,960 / st in late September, according to Platts pricing data.
“If you’re looking to expand the power grid, you’re not going to get the transformers you need,” said John Anton, director of pricing and purchasing at IHS Markit. “There will be a shortage of electrical steel next year and probably for many years to come and therefore there is going to be extreme pressure on people who make electrical machines out of electrical steel.”
“Deadlines for processors [I’m now] the hearing of the largest companies in North America has been over 12 months, ”said Anton.
Coal and natural gas
Another potential constraint is the coal supply, according to Platts Analytics.
“Global demand for coal is expected to increase again in 2022, as developing markets, China and India in particular, will require additional energy supply from coal to meet the growth in demand for energy, ”said Platts Analytics.
In the United States, the EIA forecasts that electricity sector coal inventories have declined by about 51 million short tons, or about 38%, in 2021 and will continue to decline by 10 million st , or 13%, in 2022, despite a 9% increase in domestic consumption. coal production in 2021 and another 6% increase planned for 2022.
Transportation is a factor in the costs of coal for power generation, and the U.S. EIA predicts that coal costs for power plants will average nearly $ 36 / st in 2022, up 3.2% per year. compared to $ 34.75 / st in 2021, which was up 2.8% from the $ 33.85 / st in 2020.
However, natural gas is likely to lessen the influence of coal on electricity prices. As of December 22, the Henry Hub futures band for the 12 months of 2022 had a nearly 2% discount from the average monthly Henry Hub spot prices in 2021, according to Platts pricing data.