WEBINAR: Energy Procurement for Spring And Beyond

As we emerge from what could likely be one of the top five warmest winters on record since 1950, you may be wondering what this means for your long-term energy procurement strategy.

In a recent webinar, we discussed the weather outlook for this spring and beyond, as well as what other supply and demand drivers you should consider for the rest of the year.

Missed the webinar?

Watch the recording now.

Impact of a Weakening El Nino in 2016

The latest data shows a sea-surface temperature anomaly of +2.5 degrees Celsius in the tropical Pacific. This places El Nino well into the strong category, but we expect it to weaken this spring and summer. Temperatures this summer could be influenced by how quickly that happens.

A slow weakening could lead to a cooler summer, while a fast weakening may lead to a hotter summer.

Supply and Demand Drivers

Gas storage is another factor that will potentially impact supply and demand. There is a strong correlation between the year-over-year gas storage surplus and the NYMEX Index.

As of Feb. 19, gas storage stands at 2,584 Bcf, 31 percent above this time last year and 29 percent above five-year average levels. Last February and March, we saw strong draws in late February, and the deficit is expected to further widen year-over-year, which could put short-term pressure on prices.

In early February, the Energy Information Administration forecasted storage by the end of March at 2,096 Bcf, over 43 percent higher than storage last March. A new forecast is due out within the next week, and end of March storage could be revised higher. The record for gas storage was set in March 2012 at 2,409 Bcf.

The weather over the next few weeks will determine how low prompt month prices need to go to help balance storage. The market will really be watching to see how be that storage deficit gets compared to year-over-year levels. The market will shift its focus to managing storage to 4 Tcf by November.

Meanwhile, natural gas production in the Lower 48 states dipped down in January but has since rebounded through most of February, offsetting declines in Texas, Louisiana and Arkansas.

A recent Bentek report estimates returns on shale plays are beginning to tighten as Internal Rates of Return are below 10 percent. Since last January, 46 companies in North America have filed for bankruptcy protection.

Despite steep cuts in rigs, Northeast production has been resilient so far in 2016, offsetting declines elsewhere. Prices at or below $2/MMBtu will likely force producers to defer further production as rates of return continue to narrow.

In terms of pricing, we’re seeing a continued downward shift in NYMEX Forward Curve and calendar strips pricing, as shown in the charts below.

Although predictions of a tighter supply-demand balance in coming years pushed outer year NYMEX prices higher earlier this winter, Cal  2018 and 2020 gas prices have now declined to new life-of-contract lows. Gas production has proven resilient, even in the face of low prices and plunging drilling rig counts.

Natural Gas and Power Procurement Strategy

So what does all this mean for your energy procurement strategy? Think of your energy purchasing like an investment portfolio. Having a structured, systematic plan can reduce the impact of market highs and lows.

Constellation’s Minimize Volatile Pricing (MVPe) is similar to dollar-cost averaging in investing. It targets energy purchases made on your behalf using an algorithmic approach that ensures higher percentages of load are locked in when prices are lower in comparison to historical averages.

Over time, you make smaller and more frequent purchases without being burdened by each transaction decision. You can set your goals in advance and monitor progress while the program does most of the work.

To learn more about MVPe and other energy procurement strategies, talk to your Constellation representative or request a quote today.