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Buying strategies - Sept 19, 2014

Buying strategies

Market Overview

Summer is ending and for energy buyers, that means that winter is around the corner.  For many energy managers, this time of year can be a buying season, with the hopes of a “fall dip” to secure purchases before the start of winter and the risk of sustained cold weather sets in.  Although there is no way to predict a “best time to buy,” here is what we know about the past and future of the energy markets, that can help your business make an informed decision about its buying strategy.

Let’s start by giving the meteorologists some credit.  As forecasted, this summer has been mild in the East and hot in the West.  Unfortunately, few predicted last year’s Polar Vortex.  And, even if it was predicted, would buyers have paid a significant premium based on a weather forecast?  Either way, the Polar Vortex continues to affect prices for the upcoming winter—especially in the U.S. Northeast, where there are large regional price premiums in place. 

From a NYMEX perspective, prices fell consistently from March through mid-July of this year.  Since then, natural gas Prompt Month futures have been range-bound between $3.70 and $4.10 per MMBtu.  Long-term NYMEX strips have fallen modestly since last winter, but are now at a premium to the near-term and, as noted above, regional prices are following a different pattern.  Winter natural gas basis and power prices are remaining strong for any market where there was volatility last winter.  When the NYMEX falls, the gas basis rises to offset any impact on the combined price (NYMEX + basis).  And, this sum is the driver of the regional power price.  This is especially true in New England where winter gas basis is at an all-time high, despite strong storage injections this season.  Prices for Winter 2015/16 are seeing a similar trend, although less pronounced.

What about the impact of shale gas and strong storage?  The impact on NYMEX has already been described above.  And, beyond NYMEX, summer basis and power prices have been in free-fall mode.  Pipelines are wide open in the summer and record gas production, combined with the mild eastern summer, has suppressed prices.  But, the pipes may be constrained again in the winter.  While winter prices are near their historical highs, short-term and non-winter forward prices are very low and this has contributed to a better value for the long-term.  The value varies by region depending on the balance of winter premiums versus non-winter discounts.

What should your business do?  As always, it depends on more than the energy markets—it also depends on your business, your goals, your concerns, your risk tolerance, etc.  So, take any commentary below and apply it to your particular situation.

Overall, hedging the winter prices now is worth considering and use of a managed product can be a big help in this murky price environment.  Here are some additional strategy and product considerations, some of which we posted here a few months ago.

Winter prices remain stubbornly high for the Northeast, which seems to be a reason not to buy.  But, the primary reason is winter risk, which has been inflated following the Polar Vortex.  The best chance for a dip is a mild winter, but this would entail taking significant risk.  Some early forecasts are calling for cold, although not as bad as last winter.  This data is basically supportive of buying something now (see layering comments below).

  • In addition to winter, you might want to consider buying beyond the winter.  While prices for Q12015 are relatively close to their all-time highs, prices for Q32015 are close to their all-time lows.  There could be more downside during the winter if it is mild, but why not consider buying beyond the winter, where there is good value and much less of a risk premium?

  • Prices for 2016 are worth watching.  Calendar ‘16 is about $4 below Calendar ‘15 and Winter 2016 prices are about $7 below Winter 2015 prices.  It may not necessarily be worth buying right now, but it could be prudent to set targets in case the market falls further.  Should prices be higher or lower for the long-term?  While shale growth is prolific, don’t ignore potential impacts from LNG exports, new gas pipelines, EPA regulations that discourage coal generation, and strengthening industrial demand.  As noted above, value in the regional power markets also varies and should be examined.

  • For those with a strategy that allows layering of forward purchases, winter layers are a defense at this point and summer purchases could be an initial value purchase, to be followed by more purchases if prices drop.  Long-term buys can provide rate stability and are a risk management tool.  And, index market participation can bring value, as long as risk is managed appropriately.

Energy markets and your energy strategy are both very complex.  Please reach out to your Direct Energy Business representative for help in implementing the best buying strategy for your business.