By Zack Hallock, Senior Energy Services Advisor.

Competitive Energy Services

The Great Reshuffle

It’s no secret that consumers across the globe are facing historically high gas prices at the pump (this isn’t a uniquely American problem).

The “price at the pump” is not always the best litmus test of energy markets but it is a fair representation of supply/ demand imbalances across the energy sector right now. Fundamentally we have leveraged a globalized economy for more than a decade to interconnect our flows of energy between the United States and Europe. Some may say we have reached the point of no return – a place where we cannot separate ourselves from the EU on a commodities risk/ security perspective.

The invasion of Ukraine by Russia showed the world what happens when we need to reconfigure this interconnected flow of energy at the drop of a hat. Keep in mind that in early 2022, Russia only accounted for about 3 percent of total crude oil imports in the U.S., while simultaneously accounting for approximately 20 percent of European oil supply. In countries such as Lithuania and Slovakia, Russia accounted for more than 70 percent of their oil supply! With the EU firmly banning any Russian crude via sea (about 2/3 of supply from Russia to Europe) by December 2022, who is left to supply this product? You guessed it. The United States is first in line to meet that demand for our allies across the Atlantic.

What does this mean for U.S. markets headed into winter 2022-23? The U.S. Energy Information Administration (EIA) is forecasting “heightened levels of uncertainty” in the latest Short-Term Energy Outlook (STEO) which is a detailed monthly update on U.S. energy markets. Looking ahead to 2023, the EIA claims the major factors in our supply/ demand balance will continue to be uncertain with regard to the impact of Russian sanctions, the production decisions of OPEC+, and finally the rate at which U.S. drillers increase oil and natural gas production. For a deeper dive into how this impacts your energy budget on site, take a look at CES President & COO Andy Price’s piece from April 2022 titled “Russia’s Invasion of Ukraine: Impacts to World Energy Markets and to Your Energy Budget.”

In a nutshell, the global flow of energy in the form of crude oil and natural gas is currently centered around Europe. The flow of fossil fuels throughout the world – with Europe as the epicenter – has quickly entered a transition, away from Russia acting as a major player in Europe’s fuel supply to a new, and yet unknown world energy order. Russia is still producing and exporting significant quantities of oil and natural gas, but this energy is increasingly heading east to China and India. This transitory period must have a time horizon before the markets balance, as all markets do. With that in mind, history tells us that the markets will settle. It is not just a matter of when, but about recognizing the signs indicating when that moment of “normal” is coming into view. Understanding the nuances of the world energy market provides insights on timing of market stabilization and opportunity that leads to informed decision making.

New England in the Shadow of the Great Reshuffle

To distill these mammoth global forces down to impacts on your local or regional business, look no further than the constraints around New England. It is important to consider the issue of when New England’s energy demands are the highest during the course of a year’s time relative to infrastructure capacity. As you might guess, New England winters challenge the region’s energy infrastructure capacity as heating demand spikes. What provides that heating demand? The burning of fossil fuels, mainly natural gas, and oil. We know that New England is starved for adequate natural gas pipeline capacity into the region during the winter which causes an undue reliance and exposure to the global liquid natural gas (LNG) market to meet the combined heating and power generation loads of the region.

Last October, CES captured the essence of the global LNG conundrum and regional fuel security concerns in New England in a short video by Eben Perkins, Vice President, Consulting titled “What You Should Know about Fuel Security.” It’s a conversation that we continue to have today and one that will continue for the foreseeable future. Fuel security concerns pose a fundamental risk for all New Englanders and winter heating demand is our structural bottleneck. Aaron Rubin, Senior Energy Analyst did a terrific job explaining this dynamic again in a March 2022 article titled Energy Management Strategies for a Volatile Energy Market.

Over three of the four past years, winter spot gas stayed below $18 in New England as shown in Figure 1. The availability of low-cost LNG and crude oil helped keep winter prices in check, despite the region’s natural gas pipeline constraints. The winter of 2021-22 was a different story as higher LNG and oil prices caused spot gas in New England to go up nearly 75 percent from prior years.