Winter weather is on its way with chilling winds, dropping temperatures, and freezing conditions for much of the U.S. With this comes new and shifting energy market data/analysis that helps us understand what will happen with energy prices. One important change is the increase in natural gas consumption driven by heat demand and projected continued growth in the industrial and manufacturing sectors. We will examine the forecasts and predictions about the upcoming 2018-19 winter season, ascertain possible impacts to natural gas and electricity prices, and provide insights that can help consumers make prudent decisions to limit risk and better manage energy costs.
In its most recent Short-Term Energy Outlook, the U.S. Energy Information Administration (EIA) predicts that temperatures for this upcoming winter season will be similar to the bitter cold of the 2017-18 season. One key difference between this year and the last, however, is in natural gas storage levels. Projections are that we will enter the higher demand winter season with the lowest level of natural gas storage since 2005. This was caused in part by the prolonged cold temperatures into April 2018, which delayed the typical start of the storage refill season by four weeks. That, coupled with the heavy draws on storage during an especially cold January 2018, have left storage levels at low levels. Entering November we are about 17% below the five-year average, and 16.4% lower than last year at this time.
A repeat of last year’s winter weather would put significant upward pressure on gas prices given the already low storage levels. Nearly half of all U.S. households and a significant percentage of the commercial sector utilize natural gas as a heating fuel, meaning consumption will fluctuate significantly with the shifting of temperatures. Consumption of natural gas is typically 30-35% higher in winter than during fall and spring. This unpredictable consumption is a driver in the volatility of prices in the winter months. In the past 5 years, we have experienced more dramatic temperature extremes and unseasonable weather has been a regular occurrence.
Of important note is the role increased gas production and better infrastructure will play in meeting demand. While we are entering this season with notably low natural gas storage levels, we’ve seen record domestic natural gas production and pipeline construction, better enabling natural gas to be distributed across the country more efficiently to meet demand where needed. Additionally, the United States is now a net exporter of natural gas. Delivery of gas overseas as Liquified Natural Gas (LNG) is growing steadily and rapidly. Gas exports to Mexico serve its burgeoning manufacturing sector, which is growing steadily as new pipelines are being completed from Texas to Mexico.
Every month, electricity created by natural gas-fired generators grows and coal generation is being shuttered. So as weather and demand for gas drive price volatility, electricity prices are affected. Our analysis indicates that when natural gas prices increase, there is a strong correlation on wholesale electricity prices. This, in turn, pushes retail electricity prices for commercial customers up a bit in short order.
As we all know, weather prediction isn’t an exact science. No one has a crystal ball when it comes to the volatile nature of changes in temperature and extreme weather events. If forecasts are incorrect and the U.S. has a mild winter like the one we saw in 2016, it would likely cause some downward pressure on natural gas prices this winter, and to a lesser extent on electricity prices. If the opposite is true, and this winter proves even colder than expected, we should expect more volatility and price spikes in the wholesale and retail markets.
APPI Energy recommends reviewing your current energy supply contracts to determine what effects, if any, price changes can have on your costs. Some contracts allow suppliers to adjust prices based on many factors including the gas market and regulatory changes. Know when your current contracts expire. If it’s during this winter, we suggest you look at prices now. It may be more beneficial to examine renewal pricing sooner, rather than later. Negotiating a contract during the winter months may lead to less advantageous pricing as we head into the heavy gas consumption of the winter demand season. It also minimizes your price risk that you will encounter if you are in a month-to-month contract during what could be extremely expensive market-based costs during the winter.
For more information about negotiating energy supply contract renewals, or to learn more about how to craft and implement a customized energy management strategy for your organization, please call APPI Energy at 800-520-6685.