Energy Purchasing: Lock In Historically Low Prices This Winter And Beyond

This has been a year of records in the energy market. Gas production in the United States has reached an all-time high, but demand is also growing, with electricity from natural gas exceeding coal-fired generation for the first time in history.

These factors and others have created a unique situation for energy buyers.

With a milder winter likely on the horizon and an abundance of supply expected to continue, it’s important to have an energy purchasing strategy that takes advantage of historically lower prices while they last without exposing yourself to greater risk later.

In a recent webinar, Constellation’s energy management experts shared insights on the energy market outlook for 2016 and beyond and recommendations for the best procurement strategies. Here are three things energy buyers should consider.

A Warmer Winter Could Result in Lower Demand

The 2015-2016 winter weather forecast predicts a strong El Nino, which typically leads to a mild winter for most of the United States. This could lead to less natural gas demand and lower power prices, especially in gas-constrained regions such as the Northeast.

Although colder risks still exist in the autumn months and there is a small potential for El Nino to collapse, most indicators point to El Nino remaining strong through at least the middle of the winter.

The Natural Gas Market Is Oversupplied for Now…

The current natural gas market is fundamentally oversupplied due to an increase in production. This has resulted in energy prices reaching multi-year lows. In fact, we’ve seen the NYMEX forward curve shifting roughly 30 percent lower than last year, which is expected to continue through 2020.

In April, total gas production reached an all-time record. We’re on pace to enter the winter with a record supply of storage. We’ve seen production hitting new records on almost a monthly basis this summer due to increased drilling efficiencies and better pipeline capabilities, enabling producers to ship more. On the other hand, production in Texas has been declining, leading to a 62 percent reduction in oil rig counts.

This means that although production has increased, net growth has essentially been flat. Any sustained reduction in output could lead to an increase in prices in the future.

Demand for Natural Gas Is Rising

In the middle of an overabundance of natural gas, we’ve also seen an increase in demand for several reasons. First, more coal-fired power plants are switching to natural gas because it’s more cost-effective. For the first time, the share of electricity generated from natural gas exceeded the share generated from coal.

We also expect to see incremental increases in demand through 2020 due to higher liquid natural gas exports into Mexico. With five liquid natural gas projects coming online in the next few years, about 13 percent of the natural gas we currently produce is expected to be exported by 2020.

If demand continues to grow, natural gas prices should level out.

Energy Price Trends and Procurement Strategies

Given the trends toward oversupply and flattening prices, customers are looking to 2016 and even 2017 to gain a better value. There are several ways they can take advantage of the current market. One strategy is to continue to ride out the lower prices. Other customers want to gain greater budget certainty by locking in prices for the coming year and beyond. With market analysts forecasting some upside risk in the gas market given the uncertainty for the next few winters, energy buyers should consider a blended solution that allows them to layer in fixed prices to take advantage of the current value in later years.

Listen to the full recording and download the presentation from our October webinar and contact us today to learn more about what energy purchasing strategy is right for you.