The lack of sustained cold temperatures across the consuming regions has curbed heating demand from residential and commercial consumers. El Niño has had a major influence this winter, so the bouts of below normal temperatures that have swept the eastern half of the country have been short lived. As we approach the spring, natural gas and power fundamentals continue to be bearish because of the following factors:
- Inventories close to record levels
- Surplus of 45.6% vs. last year’s levels
- Surplus of 35.6% vs. the 5-year average
- Production has slowed down, but remains at very high levels
- Production in the Marcellus and Utica shales is close to record levels
- New pipeline infrastructure in the Northeast has increased the flow of gas to other regions
- Milder than normal winter
- lower than normal Heating Degree Days
- Expectations of lower demand through the balance of the winter
- Lower than normal natural gas withdrawals expected through the balance of March-2016
The combination of these factors has weighed on natural gas and power prices and the front month is again testing a 17-year low. The back end of the forward curve has also come down significantly, so forward premiums have also collapsed to $0.20/MMBtu when comparing 2020 to calendar year 2017.
Even though heating demand has been lower than normal, demand from the power sector (“power burn”) is currently at record high levels. Power burn used to average 18Bcf/day, but so far this winter it has averaged ~24Bcf/day as natural gas continues to displace coal to generate electricity. Consequently, natural gas withdrawals from inventories have been close to historical benchmarks. Therefore we have seen support at key critical levels.
Current forecasts are calling for mild temperatures across the country through mid-March, so we do not expect that higher demand will dent the current supply glut.
How to play this market
The shoulder months typically offer good buying opportunities since these are periods of low energy consumption. If inventories end at record levels by the end of the heating season (March 31), front month prices could test lower levels. It is likely that the spring will set the stage for the continuation of a very low price environment. Consumers who have typically purchased energy commodities in short term tranches should evaluate much longer options. Depending on the risk tolerance there are different ways to play this market.
Low Risk Tolerance Buyers- Will have the opportunity to lock long term exposures with a Fixed Price product.
High Risk Tolerance Buyers: We recommend to evaluate retail product structures that provide some market participation such as Heat Rate products or Fixed Price flexible products that allow consumers to lock exposures over time.
National Account Buyers: Have a natural portfolio effect which can allow them to diversify their short and long term exposures across markets.
If you are uncertain about your Risk Tolerance, Acclaim Energy can help you determine which would be the best strategy for you. Contact your Acclaim Energy representative to evaluate which option best fits your needs.
