Why didn’t the tomato cross the border? It couldn’t ketchup with the tariff hike. Okay, maybe it’s a bit early for tariff humor. But in all seriousness, the recent tariff announcements have only added complexity to the economic outlook, making it almost impossible to forecast future market prices. Tariffs generally lead to higher costs and, on a broader scale, can signal the potential for a recession – typically a bearish indicator of energy prices. That said, the fundamentals of supply and demand in the power markets are bullish and should apply upward pressure on energy prices.
This has created a delicate tension: upward market forces supporting higher energy prices on one side, and the risk of a recession is applying downward pressure on the other. What is a buyer of electricity to do? Our overall energy market sentiment is bullish and that recent decreases in power prices is a good opportunity to make longer-term purchases for electricity. Here is the rationale behind this belief.
Natural Gas Inventories and Global Impact
Coming out of this winter, natural gas inventories (both in North American and Europe) are below where they were a year ago. This is important because electricity prices are often directly correlated to the price of natural gas, since many power plants use natural gas for fuel.
Europe’s natural gas storage levels are a significant factor to consider since domestic exports of Liquified Natural Gas (LNG) are expected to increase as Ukraine has stopped transporting Russian natural gas to Europe.
Natural gas futures for May 2025 to March 2026 fell by20% since March 31st, mostly fueled by the fear of global recession, driven by tariff escalations.
This drop in the fuel price for power plants caused near-term electricity prices to fall by about 1¢/kWh ($10/MWh) since April 2nd.
Even before the tariffs were put in place, forward electricity prices in Texas were deflated for calendar years 2026 through 2029 compared to this time last year, making longer term purchases of electricity cheaper than shorter terms of 24 months or less. This has created good buying opportunities.
Demand Outlook and Tariff Influence
Less domestic natural gas in storage, coupled with higher overseas demand, are both bullish factors. Additionally, domestic demand for electricity is expected to increase in the future. Higher electricity demand from data centers and other computing facilities are putting upward pressure on electricity prices.
Right now, the bearish fear in these markets seem to have overcome the fundamental forces of supply and demand, which is expecting both natural gas and electricity prices to increase. The tariffs seem to be a counterweight that is pushing electricity and natural gas prices down and are the wildcard in this market.
The tariffs were introduced with the stroke of a pen – and they could just as easily be rolled back the same way. While their duration and magnitude remains uncertain, the longer they stay in effect, the more they contribute to growing recession concerns.
Key Takeaway for Electricity Buyers
All of this is to say that both the natural gas and electricity markets are not responding to the natural forces of supply and demand and are primarily moving in the opposite direction to what one would expect, absent the tariffs.
Prudent electricity buyers with contracts expiring this year should not wait to make purchases and capitalize on recent price drops and consider terms that are 24 months or more.
Even though electricity prices in Texas and in other parts of the country are higher than in the past, this recent correction is a good purchasing opportunity. Tariffs aside, the broader concern is that electricity prices are likely to get worse before they get better, and the recent sell-off in the broader energy commodity market could be the electricity buying opportunity many have been waiting for.