Tips for Managing Energy Purchasing As Prices Near 10-Year Lows

The combination of several factors—including warm temperatures, strong production, high storage and record short positions by speculators—has pushed natural gas prices to near 10-year lows this week as we approach winter. The NYMEX November 2015 natural gas futures contract recently declined to a low of $1.948/MMBtu, the lowest price on a continuous prompt month price chart since April 2012.

This is only 4 cents above the 10-year low price of $1.902/MMBtu set on April 20, 2012 and illustrates a 22 percent decrease in gas prices in less than a week. Continued warm weather in the first half of November, combined with additional storage injections, could continue to push down NYMEX prices in the short term until colder weather increases heating demand.

NYMEX Prompt Month (Weekly Chart)

Source: NYMEX

If this has you considering how to manage your energy purchasing over the next few years, here are a few things to consider about what numbers to watch and how to adjust your strategy accordingly.

Gas Storage Approaches Record Highs

There are several fundamental drivers pushing NYMEX prices lower this week. First, gas storage is approaching all-time record levels as above-average temperatures across much of the eastern half of the U.S. will likely allow for injections to continue into mid-November. As of October 23, storage stands at 3,877 Bcf, or 12 percent above year-ago levels, a 4 percent surplus to 5-year average, and also nearing the all-time record storage level of 3,929 Bcf set in November 2012. A Mild Winter Is On the Horizon NOAA’s current 8-14 day weather outlook illustrates how above-average temperatures could set the stage for injections to last into mid-November and raise storage closer to 4,000 Bcf. Mild temperatures across much of the country could put further downward pressure on balance of winter natural gas prices.

Source: NOAA

Natural Gas Production Remains High

Besides warmer than normal temperatures, growth in dry natural gas production remains nearly 2 percent above year-ago levels as of the week ending October 28, according to EIA & Bentek Energy. The decline in prices has led to drilling rig counts being cut to all-time lows, but output remains robust due to producers who continue to focus on the most prolific plays in Pennsylvania, Ohio and Texas.

Prices in the low $2/MMBtu range will put increasing pressure on production economics as drilling costs will exceed breakeven points for all but a few shale fields.

Financial Speculation

The impact of bearish bets of financial participants such as banks and hedge funds cannot be overlooked. The most recent position report from the CFTC for Managed Money shows them net short 155,588 futures and options contracts as of the week ending October 27, meaning investors are anticipating further decline in NYMEX prices if winter weather comes in warmer than normal. This is a five-year high in a short position for Managed Money, as they are usually net long NYMEX contracts approaching the start of winter, rather than net short.

Any change in the weather to colder than normal temperatures or consistent cuts in production could spur a “short covering” rally in the NYMEX gas market.

Source: NYMEX

How To Adjust Your Energy Purchasing Strategy

Although natural gas prices are at historic lows now, that doesn’t mean they’ll stay that way. Consider an energy purchasing strategy that allows you to take advantage of the opportunities that exist now and minimizes volatility in the years to come. Constellation offers a variety of diversified energy purchasing strategies, including:

• Point-in-time pricing—The ability to lock in gas prices or ask Constellation to watch the market for a target price.
• Weighted average cost of gas—Customers pay the spot market price for gas consumed each month.
• Minimized Volatile Pricing (MVP)—Customers can automatically and systematically hedge portions of their gas volume over time through established targets, similar to dollar-cost averaging.
• Minimized Volatile Pricing for electricity (MVPe) —Customers can purchase electricity with dollar cost averaging, similar to the way they diversify their investments.

To learn more about our energy purchasing options for natural gas, contact us today.