Forecast heat wave for desert Southwest promises surge in US gas, power prices

Natural gas and power prices across the desert US Southwest and western Texas could be expected to spike later this week as temperatures in multiple cities across the region soar to exceed 110 degrees Fahrenheit.

From June 11-15, states stretching from California and Nevada to Texas will see at least a 70-80% chance for above-average temperatures, according to the six- to 10-day outlook from the National Weather Service. In Las Vegas and Phoenix, high temperatures are forecast to top 110 F by this coming weekend.

On June 6, portions of Arizona and southwestern Texas were already under excessive heat warnings or excessive heat watches issued by the weather service as the summer season began in full force.

In morning trading June 6, natural gas prices at downstream locations across the Southwest were up sharply from prior settlement levels. At Kern River Gas Transmission-delivered outside Las Vegas, spot prices were up about 70 cents to $8.85/MMBtu. At El Paso-San Juan, the cash market was up around 55 cents to $8.55/MMBtu, Intercontinental Exchange data showed.

The anticipated surge in cooling demand could lift spot prices across the region to more than $10/MMBtu later this week. Gas-fired power burn is forecast to surge 1.3 Bcf, or about 45% from current levels, to reach 4.2 Bcf/d June 10—its highest level since February, Platts Analytics data showed.

Over the same period, the California Independent System Operator forecast peakload to climb nearly 6 GW from current levels to a nearly nine-month high of 36.15 GW June 10. For comparison, peakload averaged less than 28 GW in May and around 33.75 GW in June 2021.

The forecast rise in peakload has also driven up power prices. SP15 on-peak balance-of-the-week was bid at $120/MWh and offered at $150/MWh on ICE, more than 60% higher than where the day-ahead package traded. Palo Verde on-peak balance of the week was bid at $180/MWh and offered at $350/MWh on ICE, compared to with day-ahead package trading near $99/MWh for June 7 delivery.

Outlook

This summer, unusually hot weather is forecast across much of the West from June to August, according to a seasonal outlook from the weather service, pointing to a likely continuation of the hot weather trend.

Thanks to recent capacity changes in the desert Southwest generating stack, even weather-normal power burns are forecast to trend at a record-high 5.1 Bcf/d average in July and August, according to a summer forecast from Platts Analytics.

The forward gas market already is already bracing for higher prices during the peak cooling months. At Kern River-delivered, the July and August contracts are priced at an average $10.01/MMBtu, or a nearly $1.50 premium to Henry Hub, up sharply from an average 3-cent discount in June. At El Paso San- Juan, the July-August forward market was priced at an average of $8.25/MMBtu, about a 27-cent discount to Henry Hub, compared with a month-to-date average basis discount of 46 cents, S&P Global Commodity Insights data showed.