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Energy Buying Strategies: September 2014

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Summer is ending and for energy buyers, that means that winter is around the corner. For many end users, this can be a buying season – while looking for a “fall dip” or putting in purchases before the start of the winter and cold weather risk. I’m not a believer that there is a “best time to buy”. There are too many variables in the energy markets for it to be that simple. And if there would be a pattern to take advantage of, traders and analysts would find it and it would quickly disappear. The following is a brief look at the market and strategy considerations.

Let’s start with 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 Northeast U.S. where there are large regional price premiums in place. 

From a NYMEX perspective, prices fell consistently from March through mid-July. Since then, natural gas prompt month futures have been rangebound 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. But 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. Winter 2015-16 is 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 freefall mode. Pipelines are wide open in the summer and record gas production has combined with the mild eastern summer to suppress 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 to do? As always, it depends on more than the energy markets, but also on your business, your goals, your concerns, etc. So, take any commentary below and apply to your business as best as you can.

Overall, I believe that hedging the winter prices now is worth considering and use of a managed product can be a great help in this murky price environment. Here are some additional strategy and product considerations, some of which we discussed 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 is basically support of buying something now (see layering comments below).  
  • In addition to winter, you might want to consider buying beyond the winter. While prices for Q1 2015 are relatively close to their all-time highs, prices for Q3 2015 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?
  • Even 2016 is worth watching. Cal-16 is about $4 below Cal-15 and winter-16 is about $7 below winter-15. It may not necessarily be worth buying right now, but worth setting 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. 
  • Now to layering, which is an option for both near-term periods and beyond. Winter layers are defensive against being exposed to price volatility without locking in 100% of your load at the current market price.
  • 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 participation can bring value as long as risk is managed appropriately.
    • Two layering products include Direct Energy Business’ PowerPortfolio and Load Following Block & Index products. The offerings have several key differences, but both allow layering strategies and index market participation as part of a procurement and risk management strategy.  

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

Posted: September 19, 2014