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You Need to Protect Your Natural Gas Budget this Fall: Here’s Why

By Direct Energy Business
business in the fall

Fall has arrived, and there’s no better time to prepare your business for the colder months ahead. While it’s normal for gas prices to rise during the winter, this year's outlook is more risky than usual due to the record-breaking high temperatures that made headlines over the summer. 

Here are the top four factors that could affect natural gas prices in the coming months, and what you can do to protect your business. 

1. Low Storage Levels

In the winter, energy consumers use more gas than the United States can produce. How do we make up the difference? We inject gas into storage wells during the summer when gas consumption is low, in preparation for winter heating season.

But this winter, energy strategists project that gas storage levels will be the lowest they have been since 2005. Here’s why:

Electricity and natural gas markets are closely linked. As coal- and nuclear-fired power plants retire at increasingly higher rates, power generation relies more and more heavily on gas-fired plants. 

And this isn’t new - natural gas has made up the majority of capacity additions over the past 20 years. In 2017, gas supplied 32 percent of U.S. electricity generation, with coal supplying 30 percent, and trending downward. During power-hungry summers when homeowners and businesses are blasting the air conditioning, gas has become critical to producing power.

The summer of 2018 was one of the hottest on record. That means electricity demand was higher than usual, ergo more natural gas was required to generate power. The more gas we consume during spring, summer, and fall, the less is available to inject into storage for winter use. 

The low storage levels this winter suggest that the gas market could be volatile, with periods of high prices. In fact, we’re already seeing higher than usual natural gas prices, even as new pipelines are built to improve transmission and distribution.

Periods of volatility in the gas market can be difficult for businesses on a variable rate. There’s often a lack of budget certainty, and consumers may end up paying more than they expect. Businesses looking to avoid the unpredictability have an opportunity to lock in a fixed rate before winter arrives.

2. High Market Prices

Because low storage levels in the fall suggest risk, prices in most markets are higher this winter than in previous years.

In fact, in many markets today, a 36-month contract is priced lower than a 12-month contract. This is unusual for commodity markets, which customarily value future prices at a higher rate than the current price. The phenomenon is called backwardation, and it’s primarily caused by a shortage of commodity, as we see this season in the gas market.

For consumers and businesses that are able to lock in an energy contract for the long term, backwardation is a signal that it could be a great time to buy.

3. Insufficient Infrastructure

Natural gas demand has skyrocketed in the past decade. But despite recent infrastructure expansions, the U.S. still lacks sufficient pipeline and storage infrastructure to meet gas demand in some key markets. 

Gas used to meet winter demand and power generation needs flows on the same pipelines, which can cause congestion. The potential for short-term supply disruptions due to insufficient pipeline capacity is at its highest in the winter.

Because of this risk, contracting with a reputable gas supplier is more important than ever. Trustworthy suppliers have the connections, resources, and foresight necessary to help you meet the demands of your load without bearing the potential of skyrocketing costs due to pipeline constraints. 

4. Extreme Weather

If low storage, market volatility, and insufficient infrastructure weren't enough, unpredictable winter weather adds one more critical variable, and can have a major impact on natural gas supply and demand.

In January 2018, the Eastern United States experienced a historic “bomb cyclone” that dropped snow and ice from Florida to New England. This period of severe cold (the coldest since the 2014 Polar Vortex) brought on some of the biggest demand days for natural gas and severe congestion across pipelines in the Northeast. Inventories dropped significantly, and prices skyrocketed tenfold.

Even just the forecast of bad winter weather has the ability to influence gas prices and cause volatility. To avoid dealing with the effects of a winter storm and high energy prices, businesses can opt to lock in a fixed rate during the fall.

 

Lock in a fixed natural gas rate today to protect your business this fall and beyond. 

Browse Gas Rates

Posted: October 25, 2018

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