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USEP Newsletter – Volume 1 – Summer 2018
The weather and energy prices – bound at the hip!
Upstate New Yorkers really appreciate the great summers. We are known for having “four distinct seasons”, but the highlight for most folks is terrific summer weather. The summer of 2018 has delivered some wonderful weather for upstate New York, but it has been a bit of a wild ride. April was the coldest April in 75 years, and May was the warmest May ever! It felt like we went from winter to summer, without the benefit of spring. This was not just the upstate New York area. Many parts of the northeast and Midwest experienced a similar weather pattern.
Although it’s only August, the emerging long term weather pattern is setting up for an El Niño fall and winter. The federal Climate Prediction Center stated that the warming Pacific waters indicate the return of an El Niño pattern later this year, and there is a near to a 70% chance of an El Niño in the northern hemisphere for the winter of 2018-19. Based on past experience, this means a warmer-than-normal fall and winter in upstate New York and the northeastern United States.
What does this mean for energy prices?
Presently the forward market for electricity and gas offers some attractive pricing. The forward strip looks attractive by historical numbers, but is up from first quarter low points. The graph below demonstrates the seasonality associated with typical electric prices. The weather pattern discussed above would suggest that variable prices will continue to outperform the fixed market. There will always be some volatility and that should be expected. There is one other point worth referencing. The natural gas storage levels are 565 BCF behind the 5 year average. If that continues (or worsens) that could make for bullish gas (and therefore electric prices). If this gas storage scenario plays out, it adds to typical volatility. On balance, however, we believe the El Niño forecast will be most critical factor in the marketplace. For customers looking to avoid the volatility, the forward prices offer a good opportunity to mitigate that risk. For customers driven by the so-called bottom line, we believe the variable market will continue to outperform the fixed market. Contact your energy consultant for further details and to develop strategies specific to your business’ objectives.
USEP Newsletter – Volume 2 – Winter 2018
The Natural Gas Market and Volatility
In our last newsletter, we discussed the natural gas storage numbers and the fact that they are far behind historical average going into the winter season. Gas Storage levels were at 3.2 TCF, well behind the historical 5 year averages of 3.8TCF, and they never caught up by the time winter weather arrived. This was a clearly bullish signal. The other critical factors in energy pricing were actually pointing in the other direction. The natural gas production numbers looked very strong over the summer and fall, and the weather also looked bearish. As you may recall, there was a 60% likelihood of an El Nino winter, and that portends a warmer than normal winter in the north east. Well, things changed, and the long term weather forecast quickly pivoted from a “moderate El Nino forecast” to a colder than normal November. With lower storage levels in place, there was no buffer; the utilities were very strong buyers and the market had nowhere to go but up. And, gas prices have risen by over a dollar in the last month.
Remind me, why are natural gas prices so important to electric prices?
In the electric industry, there is much talk about fuel mix, which refers to the type of fuels utilized to generate electricity. The graph below (courtesy of the NYISO) shows the mix of fuels used for electrc generation, and a whopping 57% comes from natural gas and dual fuel (which is generally natural gas or oil). Coal plants, previously dominated this mix, but are down to 10% and sinking, as the coal plants cannot compete with high efficiency (and much newer) natural gas generation plants. So, natural gas matters to electric prices.
Where do we go from here?
Weather is always important to energy prices, but this year (given the storage issues discussed above) the weather is critically important. The challenge has been that the long term weather forecasts have changed drastically over the last couple of months. The forecast has gone from potential El Nino (warmer than normal in the north eastern United States) to colder than normal in the northeast and mid-west (NOAA November 19th forecast) to a more mixed forecast (issued November 30th). The most recent forecast would suggest downward pressure on prices, with much of the major population areas in the northeast and mid-west showing a probability of above average December temperatures. So we have a more favorable forecast, but we also have November in the books as the ninth coldest November on record nationally since 1950. Take a look at the forecast below.
Strategies for this Environment.
In a volatile market, it’s important to not over react to moving prices. Emotional decisions based on “today’s market” rarely lead to good decisions in the long run. Another important observation – the winter strip has moved up dramatically, but the “out months” (April of 2019 and thereafter) have moved up much more modestly. Currently, (as of this writing) only 3 months for winter 2019-20 are above $3.00 dth. If you are currently in a variable priced product, you may be in for some higher bills, but remember that the variable products have outperformed (provided lower pricing to customers) over the long haul. This has been the case in almost every calendar year in the last 20 years. Even in 2014, when the polar vortex term was coined, the market experienced high prices for three month, and then settled down to much more typical pricing range. Being in a fixed price contract avoids the fluctuation in prices but has a built in premium that could result in more costly supply if you pick the wrong time to fix. If you are in a fixed price contract, you have avoided this problem. Look for the right time to re-contract when your existing term ends. As always, and perhaps more importantly than ever, we suggest you contact your representative or consultant for strategies specific to your situation and objectives.
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