The sharply negative month-to month change numbers in February 2016 for natural gas and electricity prices indicate that the bear market in prices for both commodities that dates back to the first week in February 2014 continued with conviction.
The question now is, what to expect going forward through the balance of the year? Unlike some commodities such as corn, soybeans and crude oil, the price history for natural gas and electricity is somewhat short. Henry Hub natural gas futures started in 1990 and wholesale electricity price data is somewhat suspect prior to the formation of Power Pools with locational marginal pricing (LMP) in the 1999-2006 time frame. All of the spot and forward electricity pricing that Alfa Energy tracks is after the introduction of LMP in these pools. We do believe the data set we have is robust enough to use in trying to discern possible future movements of these two commodities.
In our job as an energy consultant, it is important to distinguish the specific type commodity exposure that our procurement clients have. Our customers are generally “short” both natural gas and electricity for all of the forward periods they have not contracted for. This is important to understand as our clients try to manage their energy budgets against a price that is always changing.
In the charts for this article we are trying to show customers that the current forward curves for electricity and natural gas are below most of the historical spot prices for both commodities. These forward prices are a bit above what the spot pricing has been in the last two or three months and that is because of the incredibly low spot prices. It is also because for the most part, forward prices tend to reflect a risk premium above the current spot market.
Things have changed for both the natural gas and electricity market over the last 5-8 years. There is the natural gas fracturing revolution that is well known and the increases in energy efficiency and demand side management in the electricity market. These good news items are however mostly discounted by current forward prices.
What may not be discounted are factors such as an increase in natural gas demand globally due to the lower CO2 emissions for natural gas versus other fossil fuels and/or an increase in summer electricity demand due to extreme summer weather which has not been experienced in a few years. These things may or may not materialize but we do know that one tenant of physical commodities is that lower prices eventually beget higher prices and higher prices beget lower prices. It is with this belief that we think it is prudent for all customers to lock in a significant portion of their future energy needs for a longer time frame than they might do normally.
Analyst – David Mousseau
Sources – REUTERS, PJM, CME
