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Paragon Commentary

Futures File: Electricity & Coronavirus

Feb 14, 2020

Electricity Shockingly Cheap

Prices for power are dropping across the United States as electricity generation costs plummet. In many markets, the wholesale price for electricity has been cut nearly in half over the last two years.

Costs are dropping as natural gas sank this week to nearly a four-year low near $1.75 per million British thermal units. Natural gas is the fuel source for one third of all U.S. electricity, and its price has been falling amidst the hydraulic fracturing production boom.

Alongside falling natural gas, the cost of renewable energy, especially solar and wind, is falling to the point that it is the cheapest source of new energy production in some areas. American investment in renewable energy was up by over 25% last year, reaching a record level.

As new, less expensive production sources come online, coal-fired plants are often being closed. Driven primarily by economics, this shift is also having a positive environmental impact.

Wholesale electricity is now worth about $20 per megawatt-hour for off-peak hours in many markets, down from $40 just a few years ago. Unfortunately for many consumers, the cost of electricity on their bill has stayed steady or even risen during the same period.

 

China Counters Coronavirus with Stimulus

After being closed for weeks due to the Lunar New Year and coronavirus containment measures, many Chinese companies were set to resume business this week. However, many remain below normal capacity due to supply shortages, transportation restrictions, and employees staying home.

This shutdown is weighing on China’s economy and will slow global trade as well, as multinational companies are dependent on China for portions of their supply chain. Meanwhile, China’s flagging economy will hurt its demand for foreign goods.

To help counter these factors, the Chinese government is injecting stimulus into the economy, a measure that many economists warn may not work. Even if they cut interest rates, reduce taxes, and increase bank loans, the underlying causes of China’s economic problems are the psychological and physical restraints caused by the virus outbreak.

As a result, Chinese-dependent commodities are still wary. Prices continued rising this week on optimism that the virus will eventually be contained while stimulus boosts demand, but values are still far below pre-outbreak levels.

As of midday Friday, March crude oil futures were worth $52 per barrel and March copper fetched $2.60 per pound. March soybeans sat at $8.95 per bushel, while April hogs garnered 64.6 cents per pound.

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