Energy Price Outlook
What a difference a year makes! Last March we were busy shoveling snow off the roofs of our businesses and homes, this year we are mowing lawns and having dinner on backyard decks ! This year's first quarter had 22% less heating requirements than last year. In the fall I had said that the purchasing environment was lining up in the buyer's favor, well the warm winter has added an exclamation point to that statement.
The Economy
The economy appears to be generally moving in a positive direction. The unemployment rate is now 8.2%, down 1.8% from its October 2009 peak, Gross domestic product continues to grow and the stock market is improving. The economic news is now more favorable than negative and even the European economic crisis seems to be subsiding. Nothing though has changed in the speed of this recovery and significant sectors, like housing continue to be sluggish. More of an election year issue than an economic issue, oil prices have been driven higher consequence of of higher worldwide economic growth and international concerns.
Supply
After this warm winter, a record amount of natural gas which was stored for use for this past winter remains in the ground. In fact, the average storage volume for March over the years 1994 - 2011 was 86% lower than 2012. The consequence has been to drive natural gas prices lower and to reduce the number of rigs drilling for natural gas. Baker-Hughes, a drilling service company, maintains a database of the number of rigs drilling for oil and natural gas. For the week ending March 23rd Baker Hughes reported that there were 25% less rigs drilling for natural gas this year compared to last year. As a side note the number of rigs drilling for oil is up 54%. All of this is good news for consumers but for the longer term implications read the article on "What do Hog Prices and Natural Gas Prices have in Common?"
Weather
The great news about the Spring is it is a weather neutral season. The cold weather is behind us and the warm weather is in front of us. Unless the summer is extremely hot, weather will not play a large issue until the Hurricane Season.
Outlook and Buying Strategies:
The huge glut of natural gas trumps the impact of the economy and the reduction in drilling. Until the surplus is consumed which is not likely until we experience another cold winter, a positive outlook continues for buyers into next winter. The expectation of Howell Energy Consulting for the next twelve months is for natural gas and electric prices to remain flat. Some declines may yet occur but these are expected to be modest. With that said the purchasing strategies remain the same as those discussed in the fall with one addition.
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.
- For customers comparing themselves to monthly utility prices, an index product that tracks the market may work for now. An index price allows you to take advantage of a weak short term market and fix a prices as the forward market begins to strengthen.
To understand how these strategies apply to your business call Howell Energy Consulting to to create a procurement plan for your organization.
