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If you keep tabs on natural gas and electricity prices, then you’ve probably been shocked by the market’s volatility and strength this winter.
NYMEX natural gas futures reached 5-year highs. Spot gas prices posted new all-time highs at more than $50 per MMBtu in parts of the Northeast US. And spot power prices were sustained above $100 for days and even weeks from parts of the Midwest all the way up to New England. We can place most of the blame on the Polar Vortex and its impact on natural gas and power demand, as well as on natural gas storage inventories. But when will it end?
Will prices fall when the weather warms? Yes, no, and maybe so. My apologies for the vague response, but give me a chance to explain.
YES
Spot prices fall as demand falls and temperatures rise, but not without risk and volatility, of course. But day-to-day and hour-to-hour prices should be lower in the spring compared to the peaks of January.
Also, if you watch the NYMEX for the prompt month (the nearest month that is traded), it should fall, because the nearest month will change from a winter month (March) to a spring month (April).
NO
But from the perspective of an end-user who shops for gas or power every six,12, or 18 months, then none of that really matters. What really matters is the price for the remainder of 2014 or for 2015 and beyond. How will a price for those terms change as winter ends? There is a very different answer to this question.
Unfortunately, the Polar Vortex’s impact on the market will be sustained through 2014 and will provide resistance to price declines.
MAYBE
This doesn’t mean that prices can’t fall. Weather could be mild. Producer output could exceed supply expectations. But the end of winter itself will not erase the impact of the Polar Vortex on prices for the remainder of 2014.
What about 2015 and beyond? Long-term prices have moved only modestly during this winter. Why? Storage is expected to normalize over time, so the current deficit has limited impact on long-term prices. But since near-term fundamentals did not push long-term prices higher, then another change in near-term fundamentals as winter ends should not cause a decline either.
REMEMBER
Current market prices reflect information currently available. We all know that winter will end, and will not be the only driver to change prices beyond the near-term. Putting near-term price volatility aside, which can be very unpredictable and sometimes unexplained, it will take new information to push prices lower. But new information could just as easily push prices higher. Prices bottomed in April 2012, but rose through April 2013.
Make sure you’re being realistic with any buying strategies for 2014 that consider potential market support due to the storage deficit. And don’t assume that high near-term prices prevent consideration of long-term prices, which may present a discount and a value for 2015 and beyond!
Keep your focus beyond tomorrow to avoid exposure to the next market surprise.
Posted: February 27, 2014