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Current Market Conditions and Your Business’ Energy Strategy

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It’s no secret that winter cold and summer heat can have a large impact on energy prices. But, after record lows and sustained cold temperatures this winter – temperatures not seen in 20+ years – and very flat, relatively low energy prices throughout 2012 and 2013, this winter’s energy prices have shown more strength and volatility than we have seen in several years.

While November 2013 had a mild start, which drove prices down, cold weather and large storage withdrawals have resulted in extreme price volatility for most domestic gas and power markets over the last month. This could result in dramatic increases in your energy bill, depending on what type of energy purchasing strategy you have in place, and it could also have an impact on the timing of future energy purchases, especially for the remainder of 2014.

Market conditions: How did we get here?

Some of the specific factors pressuring markets and causing dramatic spikes in spot gas and power prices over the last several weeks, most of which are the result of the extreme weather, include:

  • Record-high heating demand: Gas prices have soared, with record-high heating demand, causing electricity prices – which are closely correlated – to follow.
  • Power grid stress: Coal plant outages in the Northeast added to the increased need for natural gas-fired electricity generation. With gas demand already high and prices spiking, electricity prices in turn saw upward pressure.
  • Constrained gas pipelines: New England – and to a lesser extent, New York/New Jersey – have experienced demand that exceeds the capacity of the existing pipelines to those regions. While NY/NJ received relief in this regard, via the Spectra Energy pipeline (completed in November), New England’s pipeline constraints have not yet been solved, which weighs in on near- and long-term pricing in that region.
  • Large/record natural gas storage withdrawals: The U.S. natural gas storage deficit, as reported by the EIA, continues to grow, as demand for natural gas remains strong due to extreme cold. In fact, we hit an all-time record withdrawal of 287 Bcf for the week ending Jan. 10, 2014! Market participants, traders, etc. are keenly aware of the implications of large storage withdrawals and the deficits that are building over years past – which have an impact on near- and long-term prices.
  • Natural gas production freeze-offs: Some domestic natural gas drilling/production sites can become too cold to continue at full capacity or at all, which means less overall U.S. production in some areas that need gas the most.

Near-term pricing and futures pricing: Where are we now?

In addition to dramatic spikes in January spot prices, plus February and March forwards, market strength, volatility, and lack of liquidity are currently affecting prices for the remainder of 2014. But, 2014 prices can change quickly and forward contracts (2015 and above) have remained stable, which indicates value for future purchases (i.e. locking in now for future contract starts/terms).

The following graph illustrates electricity spot price volatility in several U.S. North/Northeast/Midwest markets:

  • PJM – PPL Zone (PA East)
  • PJM – Duquesne Zone (PA West)
  • MISO – Ameren Zone
  • PJM – PEPCO D.C. Zone
  • NEPOOL – Mass Hub

What do current market conditions mean for my business?

Depending on the type of product you have, the impact of the current (and future) market volatility will vary.

Are you a Direct Energy Business customer?

For guidance on your energy strategy or buying decision – especially during an unusually volatile winter - please contact your Direct Energy Business sales representative, or email us. In addition, you can view/download a more robust version of this in a PDF format, which may include the product(s) you are signed up for and your level of protection from the latest market volatility.

Stay up-to-date on market conditions

Keep up with all of the factors weighing in on the market that your energy strategy. Each week, we post a Weekly Energy Market Update video on this blog. Be sure to visit Energy Insights, our online energy information headquarters and sign up for weekly updates.

Posted: February 14, 2014