Energy Market Update: April, 2017
Energy market prices have taken an unusual turn upward as we enter the first week of April. This price jump was supported by the reemergence of winter in March following a historically warm February.
Natural gas futures have exploded 28% to the upside in the past six weeks on changing energy market fundamentals. Besides the increased heating demand in March, dry gas production has broken to the downside after being range bound for most of this year bucking expectations that production would slowly increase as a result of higher rig counts. Additional factors fueling this rally in natural gas and electric are nuclear plant refueling outages which have grown 4 GW in the past week alone. Predictions by some notable weather gurus for a warmer-than-normal start to summer should continue to support short term prices.
Although it is hard to argue against the bullish fundamentals supporting short term strength, I believe the annual highs have already been set this past January. High storage inventories, the potential of gas to coal switching if this rally has legs and inevitable production growth in response to higher prices should provide a strong head wind against continued strength.
How will this affect energy procurement strategy going forward? I am not ready to throw in the towel on my expectations of a sharp spring price drop. It is doubtful that we will revisit lows seen last spring. Although the current rally looks impressive on the charts, I would strongly argue against chasing this market higher. Let’s not forget the lesson learned from this past record breaking hot summer. The majority of the country experienced sweltering heat throughout the summer of 2016. There was little to no energy market volatility despite the heat. This combined with the expectation of new generation before summer provides a strong argument against overreacting to the current volatility.
Depending on the slope of the next downward correction, and its impact on fixed pricing, taking a partially hedged index based strategy may be the best option.