How can companies plan for energy price swings this year? There is a tug-of-war going on right now in the natural gas market. On one side is increased demand from cold weather, exports and liquefied natural gas, which puts upward pressure on pricing. The other end is being offset by a large supply of natural gas and increased production.

For much of 2017, the Henry Hub Spot price for natural gas averaged $3.12 per dekatherm (dth), a 19.5% increase over the 2016 price of $2.61. The U.S. Energy Information Administration (EIA) is forecasting a natural gas price of $3.21 per dekatherm (dth) for 2018, a 2.9% increase since last year.

Now is the time for customers to lock in their energy supply rates to maximize savings.

Impacted Regions

Natural gas prices are spiking nationally, but the Northeast is seeing the greatest swings. In some areas of New York, the average spot price for natural gas rose to over $50.00/dth for the first week of the year, versus the average 12 month strip price on the NY Mercantile Exchange of just under $3.00/dth.

We have not seen anything like this since the 2014 polar vortex. The culprit is the fact that the Northeast does not have adequate pipeline capacity to transport natural gas from Appalachia into the New York region.

Although the Northeast is the most susceptible to large price swings, other parts of the country are also impacted. According to Bloomberg Markets, prices doubled in the Dominion South hub, which supplies Southeast Pennsylvania, Eastern Ohio, Maryland, West Virginia and Virginia. Natural Gas Intelligence (NGI) reported that prices were up $2.00/dth throughout Texas.

EIA’s 2017 average retail price for commercial customers was $7.97/dth with a forecast calling for a slight increase (0.6%) in 2018. The industrial sector’s 2017 price was $4.20/dth with a forecasted increase of 2.4% in 2018.

However, as shown in the chart below, actual delivered prices vary considerably based on market sector and region of the country:

Despite the short-term volatility, longer term future contacts have remained stable due to increased production. However, prices are on the rise throughout the energy industry.

Electricity Volatility

Wholesale electric prices have been extremely stable over the past three years, but a price increase could be seen in 2018. The record cold we are seeing blanket the country is also creating price volatility for electricity.  

Electric prices are highly correlated with natural gas prices, as natural gas is the input fuel to electric generation facilities across the country. Consequently, the run-up in natural gas prices seen at the start of the year has had a direct impact on electric rates. According to ISO New England, wholesale prices have topped $200 per megawatt-hour (MWh)—more than 10 times the typical price.

The Energy Information Administration (EIA) expects a 3% increase in commercial rates and 2.7% increase in the industrial sector in 2018, compared with last year.

Where Do We Go from Here?

Short-term pricing for natural gas and electricity will be impacted by the weather for the remainder of the winter. If the cold trend continues, heating demand will increase and larger withdrawals from storage will be seen.

As of mid-January 2018, working gas in storage was 2,584 billion cubic feet (bcf). This is 368 bcf less than last year and 362 bcf below the five-year average. In fact, as shown in the chart below, storage has been below the five-year average for a very short period over the past two years. If forecasts are correct, there will be a large deficit to the five-year average coming out of the winter and this will drive prices skyward.

While an increase in natural gas demand could occur in the short term due to cold weather, it is also expected to increase in the long term. One main reason is that natural gas has become the fuel of choice, especially as more and more coal plants have been or are scheduled to be retired.

Don’t Get Complacent

Long term natural gas and electric prices have remained stable over the past couple of years and it is easy to fall into the trap of thinking that prices will remain steady in the future. However, history has shown us that prices can change quickly. Cold weather for the remainder of the winter or a supply disruption would certainly put upward pressure on prices. In addition, the balance between increased production and the expected longer-term demand growth will be a key factor affecting future prices.

Taking advantage of current market conditions and locking in all or a portion of your company’s future energy requirements is a sound strategy that will limit the impact of higher prices down the road.