Winter Energy Market Update: Low Storage, Low Temperatures, High Volatility
As December rolls in, the volatility we’ve predicted in the natural gas market (and thus the electricity market) has begun to manifest. As mentioned in previous articles, the market is currently responding primarily to weather-related demand intensified by historically low natural gas storage. In this article, we’ll cover the most recent market developments, what they suggest for the winter ahead, and the best ways to prepare for what seems to be manifesting as a cold winter for the USA.
On November 16th, EIA reported a withdrawal from natural gas storage of 134 billion cubic feet (Bcf), a dramatic amount for the final month of Autumn. Additionally, as of time of writing, natural gas stocks are currently 372 Bcf lower than the five-year minimum, and every storage region in the country is lower than its five-year range. In short, we’re seeing natural gas supplies plummet to the lowest levels seen in the last half-decade. These low levels of natural gas storage, taken in isolation, create upward pressure on the market due to the basic principles of supply and demand.
Weather remains one of the more decisively influential factors on the market. Weather-related consumption represents a significant aspect of demand, and this year (as in recent years) it appears that temperatures will be volatile and trending low throughout early winter. How long cold temperatures persist this winter will play a large factor in the state of pricing throughout the season and into the shoulder months. Last year, cold temperatures persisted throughout April, which drastically limited the amount of natural gas going into storage during a period of usual injection. This resulted in the historically low natural gas levels we’re seeing into this winter.
Another result of the current factors present within the market is that of backwardation. As we’ve discussed in a previous article, backwardation is a market condition in which the price of a future contract trades lower than its expected spot price. To put it another way, prices for contracts beginning years in the future may be discounted, comparatively to more immediate contracts. This is because the market anticipates that the upward trends in production and continued progress on pipeline infrastructure are likely to create downward pressure on prices in the future, absent the anomalous prolonged winter weather that lead to this current volatility.
Backwardation creates an opportunity for organizations that may wish to examine renewal pricing for a contract that does not end for a year or two into the future. However, businesses that have contracts expiring in the near future, especially during the winter of 2018/2019 should also consider examining pricing options sooner rather than later. As prices are likely to remain volatile, it’s better to start monitoring that volatility early and lock-in during a period where prices decline, rather than run up against a contract’s expiration and have to settle for whatever the price is at the time, especially as short-term contracts are trending higher than long-term contracts in several states. Going on a month-to-month rate during the winter season is also not ideal, given the severe upward pricing risk presented by these market conditions.
In conclusion, this winter is proving to be in-line with expectations; a period of sustained cold temperatures, creating significant heating demand and drawing on our historically low natural gas storage. There are certainly cost reduction opportunities for those with market expertise and the time to monitor the market. However, it’s important to be cognizant of the risks and expenses a market like this necessitates.
For more information about current market conditions, as well as our data-driven solutions for navigating the energy market this winter, please contact APPI Energy at 800-520-6685 or visit www.appienergy.com/contact.