ENERGY MARKET UPDATE: Q4, 2018
Is Your Business Prepared For Winter?
ENERGY MARKET UPDATE: Q4, 2018
It seems like it was just yesterday that I was sending out summer peak load curtailment notifications. Actually, it was, the last two peak load days in PJM were a little over a month ago. It seems that fall & spring have vanished from the calendar. In a matter of weeks or even days, we turn off the AC and turn on the heat!
As I have explained in our prior articles, due to the highest reliance on natural gas for electric generation, the winter months offer the highest and most volatile energy pricing. Both long term weather projections and the lowest levels of natural gas storage in almost a decade are sure to make this an interesting winter season. What does this mean and what should you do to protect your budget? I will steal the answer from something that I learned from the Boy Scouts, “BE PREPARED”!
Nationally, the summer of 2018 was one of the hottest on record and the summer cooling season continued throughout September and into October.
Although I do not place much trust in the weatherman, and I do not recommend betting your budget on the weather forecast, the weather will contribute the highest impact on winter market volatility. This is the time of the year when traders stay tuned to the climatologists & weather forecasters as they fine tune their predictions. We things like El Nino, LaNina, Urasia ice pack, blocking and a host of other terms any of which can trigger 10% or higher daily price swings in natural gas. Talk to ten different weather experts and you could get ten different predictions. To best predict the most likely winter weather scenario, I recommend turning to a neutral source of information such a NOAA (National Oceanic & Atmospheric Administration). According to NOAA’s October 18, winter update, a weak El Nino pattern is expected for the upcoming winter. A typical El Nino results in above average temperatures for much of the US. Since the prediction is for a weak El Nino, I would expect temperatures to come in near normal with a lower likelihood of long term colder patterns. However, this is not the only contributor to longer term weather patterns. Indicators such as sunspot cycles and snow pack in Eurasia are leading some meteorologists to forecast a higher chance for severe cold weather in February, 2019. This could trigger measurable price spikes in both the natural gas and electricity markets.
Natural Gas Storage & Production
It may feel like ancient history, but we did experience a period of extremely cold temperatures early in the winter of 2017-18. The catch term invented for this to replace, “Polar Vortex”, was, “Bomb Cyclone”. Whatever you want to call it, the end result was one of the largest natural gas storage withdrawals in history and yes this did trigger a period of price spikes. Those that were not adequately hedged felt the pain in their pocket books. Since this cold pattern was followed by one of the warmest February’s on record, prices quickly moved lower. Despite the warm February, the remnants of old man winter lingered well into April which resulted in the lowest ending storage level since 2005. Despite this, natural gas prices continued to hug the bottom of the trading range well below $3.00 due to the markets fixation on historical production levels which are up 13% vs last year. It seemed like production hit all-time highs almost every week. However, supply is only half of the picture and as the traders were only looking through one side of the binoculars, something was happening on the other side; demand was exploding! Just about every source of demand was growing; from electric generation & industrial demand to Mexican and LNG exports. The result of this change in the supply/demand dynamic is we will be entering the winter heating season with natural gas storage levels nearly 15% below the five year average and just under 10% the low end of the five year range. The EIA (Energy Information Association) is predicting inventories to hit the lowest season ending level since 2004.
This explains the 20% run up in natural gas since mid-September. Although due to the Shale Revolution, historical market lookbacks are less accurate in predicting future results, it is important to note that the last time we entered winter with such low storage levels, natural gas traded above $4.00, the current market price for natural gas is $3.19.
Coal Generation Retirements
Despite the Trump administration’s efforts to support the coal industry, coal generation plant retirements are keeping pace as cheaper natural gas generation continues to squeeze out expensive less efficient coal plants. While reduction in the cost of generation is a long term positive, the higher reliance on natural gas for generation heading into winter with extremely low storage levels is a cause for concern and increases the potential for weather related price spikes.
Although there are valid arguments on both the bullish and bearish sides on the electric and natural gas markets, the current bearish weather predictions and natural gas production combined with what I would consider to be a bullish storage levels and demand growth, the short term outlook points to potential increases in budget breaking price spikes during the winter of 2018-19. For those with open unhedged positions going into the winter, we would strongly recommend reducing winter exposure as soon as possible.
Call NJGEC today for a complimentary energy analysis that will help accurately predict your 2019 budget and identify any unknown exposures to potential winter weather related rate spikes.