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How a record-setting heat wave in the U.S. will impact the energy sector

Bob Yawger, Director of Energy Futures at Mizuho Securities, joins Yahoo Finance to discuss the outlook on the energy sector amid the record hitting heat wave expected in the U.S. and energy & natural gas prices rising across the country.

Video Transcript

[MUSIC PLAYING]

KRISTIN MYERS: Welcome back. Well, there is a heat wave hitting the country right now, which is having an impact on energy prices. So let's chat about that more. We're joined now by Bob Yawger, director of energy futures at Mizuho Securities.

So Bob, I'm looking at on a sector basis right now. Energy is leading up over 1 and 1/2%. And we've seen a lot of volatility in the energy markets lately from storms in Texas to the colonial pipeline being shut down because of hackers. But now we're undergoing this heat wave in the country. Where do you see this sending energy prices throughout the remainder of the summer into the end of the year?

BOB YAWGER: Well, we do have a little bit of a pull back today. We're down about 3% here today. The forecast for the mid-continent region, which has been cooking, is then going to get a little cooler-- a little precipitation. So those are both good things as far as power generation are concerned.

It'll slow things down a little bit. Like I said, we're down 3% here. But we're still within striking distance of the multi-year high here of 339 and change. So we're going to have very hot temperatures in particularly two of the largest cities in the United States, Los Angeles and Houston.

Houston, remember, is just a couple of months away from the freeze-in. So their system at this very moment is teetering on the edge. You may have forced blackouts here-- rolling blackouts here in the next couple-- over the course of the next couple of days, couple of weeks.

It's already 100 degrees in Houston. It's usually doesn't get that hot this fast and usually pretty close to 100% humidity for that matter. LA is cooking. They don't only have a heat problem. They also have a drought problem. So they often run on hydro. And a lot of their reservoir system has dried up to a large degree forcing reliance on the natural gas part of the fuel generation.

You want a little teaser on that, go watch the "Chinatown" with Jack Nicholson. Faye Dunaway does a good job of explaining it to a certain degree. But those are two of the biggest cities in the United States. Both having a tough time scrapping their way through these extreme heat levels. And we have a spike in natural gas prices as a result.

EIA natural gas storage well below last year, which really should come as no surprise because it was COVID-- a big COVID number. But we are also below the five-year average. So there's not a lot of gas in storage, historically speaking. We're below that five-year average.

So that also helps to bid prices. So yeah, we got a rip around our hands here. We did not take out the October high. We got really close. 336 basically, 339 in October. But there are also the longer-term forecast is for pretty hot temperatures through June.

So we got a good two weeks ahead here where it's going to continue to cook. If I was in the market, I'd be looking at some of those upside calls there. You do have a bit of a pullback in a couple of the equity names-- natural gas energy news today.

EQT's down-- resources is down about, ah, 2% or 3% today. Cabot Oil & Gas is down about 1%-plus there. COG is actually the worst-performing name in the XLE select sector-- energy sector today. But so they may provide a little bit of pullback, may provide some buying opportunity there.

- Hey, Bob. What would get us to that point where we would take out that October low? I mean, you know, I think you hit it. In California, they are dealing with heat. But they're also dealing with the drought. You've got a number of small blazes now popping up throughout the state.

And then in Texas, they're urging residents to minimize their usage. Or they're saying you're going to risk these rolling outages. So what's it going to take out that October high?

BOB YAWGER: Well, I mean, if they start to-- if you could hit like-- you could see how fragile the system is in Texas by the freeze-in. Of course, this is the exact opposite. But it's actually the same thing at the end of the day. The system is overburdened. And if it starts to go down, you know, I mean, to bring it back up or to have to resort to is alternate sources of power generation.

In the case of California, we keep on like this, you draw down more water in California, it's just going to continue to rally the spot price of gas as generators switch to natural gas and away from water. So if it continues as is will be enough to do it, in my opinion.

Like I said, we have a little bit of a break in the mid-continent area. That's why you're getting this relative pullback today. Also, today-- well, as of yesterday, actually, the RSI, the momentum indicator, was at overbought levels above 70.

So we were above 70 in RSI. That's where you get above 70, it's kind of like, the last spec is in the market. Who else is left to buy the market? Along those lines, the CFTC spec position last week was at a three-month high.

So the spec community is on to this. They know there's a problem. They know generation is getting squeezed. They know there's a bad situation, particularly in Houston and LA. They know that they're struggling for generation. And they're on board. And that kind of exasperates the situation.

They're pushing. It's a three-month high. And that spec position is long-- 361,000 contracts. That's as of last Tuesday. I suspect it's up considerably more, probably a good 10,000 to 15,000 more contracts since then. That's a big number. So they're pushing also.

Like I said, the RSI is in overbought territory. Definitely some of the weaker link was getting out today. That's why we're down $0.10 here. But yeah, those guys are-- they're not going to disappear. They're going to take advantage of the situation. They're going to be on the back of this. They're going to be pushing.

But like I said, you start getting overbought territory. You get to 340. That RSI will be up around 75 to 77. It's rare to anybody. And RSI in any commodity gets to 80. So it is going to be overbought.

We do have two weeks worth of weather. I would be surprised if we don't take out that 339 between now and then. But I don't think we'll get a whole lot further very quickly.

KRISTIN MYERS: Well, we'll definitely be watching. Bob Yawger, director of Energy Futures at Mizuho Securities. Thanks so much for joining.