Energy Price Outlook
Well this year we have had a reverse fall. Cold snowy weather in October and warm weather in November. In fact the warm weather is part of the story and for energy buyers the story is a good one. When we examine the fundamentals they all line up in the buyers favor. Nothing is forever so so lets examine what we need to keep an eye on during the upcoming months.
The Economy
The economic news continues to be mixed bag. While on the domestic front GDP has increased from 1.3% to 2.0% from the 2nd to the 3rd quarter in 2011 and unemployment figures seem to be getting better, the uncertainty caused by the European debt crisis and the inability of Congress to find a suitable compromise could create a second recession. On net, assuming Congress and Europe resolve their issues, the economy will slowly add demand and therefore put upward pressure on prices. Slow is the catchword here so current projections do not make the economy much of a factor until next fall. As a buyer pay attention to news of higher than anticipated economic growth.
Supply
Through the early summer the amount of natural gas injected into storage lagged last year and the five year average. From mid-summer through November the amount of natural gas injected into storage exceeded both last and the five year average. Moderate weather this fall and a lack of hurricanes resulted in a record amount of natural gas injected into storage. As a result ample supply has acted to dampen prices.
Weather
This past hurricane season which ended on November 30th, barely affected the Gulf of Mexico, which meant energy producers did not have to suspend operations. We are now entering the coldest months of the year. If there is a sustained cold spell, you could expect prices to run up. Through this fall temperatures have been very moderate to the extent that the injection season for natural gas storage was extended nearly two weeks.
Outlook and Buying Strategies:
While the economy is improving slowly indicating increased energy demand weather has been moderate and there is a large supply of natural gas. From September 1 to December 1 of 2011 power prices have fallen 8%. If you are in the market now you are seeing the lowest prices of the year. If the term of your contract extends past the winter of 2011-2012 you may see higher prices than you might expect since those prices assume more normal economic activity, weather and storage conditions.
Possible strategies include:
- Weak current conditions mean that the near term energy prices are affected more than longer term prices. Buyers in the market today can lock in very competitive pricing.
- Buyers with contract terms that end in 2012 may want to test the market now to set a baseline price. Have a price in mind and if the market can get to your price you should execute a power or natural gas contract.
To understand how these strategies apply to your business call Howell Energy Consulting to to create a procurement plan for your organization.
