Forward Commercial Energy Markets Pointed Higher 2013-2016.

  In the post-shale world, even though the electricity and natural gas markets are more closely intertwined than they were in the past,  when assessing future trends for both electricity and natural gas, the single greatest uncertainty is always winter weather. While deviations from normal weather in spring, summer, and fall have a significant impact on total consumption, they pale in comparison to winter deviations—even during the summer air conditioning season in Texas.

  With this winter’s heating season slowly drawing to an end, we now have some considerable clarity into how the forward price curves for electricity and natural gas are likely to move during the remainder of this year. Contrary to most expectations of late-winter and early-spring, prices for most regions have continued to rally over the past few months.  Now with the combination of hurricane season and summer price volatility around the corner, the best buying opportunity of  2013 is likely to come in the just next few months. After spring, the probability of a very hot summer—increased substantially by the extreme drought conditions still enveloping a sizeable portion of the country—is likely to help lift both near-month futures and the Calendar 2014 and 2015 strips. Later in the year, prices are again susceptible to upside risk as a winter premium is slowly built in ahead of the possibility of a very cold winter.

With both near-term and longer term futures prices likely to remain near today’s levels we suggest  that large-scale commercial and industrial electricity purchasers should be prepared to take advantage of any opportunity to lock in any uncovered positions for the remainder of 2013 and for calendar years 2014 and 2015.

Fixed Price Buyers: 

As the risk of higher peak pricing events in ERCOT increase, customers with index-based products might consider other options such as converting to a fixed-price product. While fixed-price transactions are likely offered at higher prices than where current index prices are settling, they also avoid the potential risk that real-time prices will spike more frequently and thus result in monthly invoice volatility and minimal predictability for business budgeting purposes.

 Since being able to lock in year-over-year savings are no longer possible, it’s important to recognize the value in the long term despite its premium. Additionally, while waiting longer could result in lower prices, it also increases the risk of a market surprise which is now mostly skewed to the upside.

 Portfolio and Index Buyers: 

Based on our experience, the market appears to already  have hit it’s bottom for the year  and overall volatility appears to be on the increase.  Remember that prices are still considered very low from a long term prospective despite last year’s gains. For baseload hedges, be careful using February and March lows as price targets since waiting for this could expose your entire portfolio to summer risk and leave you without any value in the market.

Dramatic short term price spikes during 2011 cause by extreme temperatures demonstrated the risks of riding an index product un-hedged. Even if your company has a higher risk tolerance than most you should certainly consider applying hedges for certain time periods in certain regions, specifically in ERCOT now that the price caps have been raised to $5,000Mwh.

 With summer just a few months away, now is the time to put any defensive hedges in place before the hurricane season and summer heat are upon us.  Although a fall price drop could provide another buying opportunity, the chances have been diminished by the recent storage trends.

 Bottom Line:

As we head into the generation maintenance season the relationship between power and gas prices can become less reliable, and it becomes even riskier to rely on just natural gas prices as the basis for your electricity procurement strategies. Recognize the fact that further gas declines, which are not likely as of this writing, may or may not result in lower prices and more importantly, don’t become paralyzed if the bottom of the market is behind us.