6 More Weeks of Winter for Gas Users
The famous groundhog emerged from his burrow at 7:25am in Punxsutawney, PA to tell us that 6 more weeks of winter are ahead. As a resident of the highest producing state of U.S. natural gas, he’s reporting right from the source. He must know what’s going on…right?
Looking back at his track record dating back to 1887, the country’s most well-known groundhog has made over 100 forecasts. However, according to Stormfax Almanac’s data, his predictions have only been accurate about 39% of the time.
While the tradition stays alive for many more reasons than just a weather forecast, most would agree they’re not relying on his predictions for decision making. That doesn’t mean, however, that you don’t stick to your own beliefs when developing plans. In the energy industry, we often hear statements like “Everyone knows the best time to buy is in March,” “We try to buy at the end of the month because the price always drops right before it settles,” or “Wait until storage numbers come in, then we’ll know the right move.” Whatever it might be, customers typically follow these guidelines to help them find patterns when trying to decide the right time to buy.
Does your company have a rule of thumb for managing your purchasing? If it does, ask these three questions to double check that it’s giving you the results you’re looking for.
- Where did this rule of thumb come from?
Energy buying strategies can stem from many different places, such as:
- corporate procurement policies,
- budgetary constraints,
- past experience (success in the past or a surprise from an unexpected market event),
- lessons learned from suppliers or brokers in the energy industry or your industry.
Identifying why your company makes purchases a certain way is a good first step to validating your current approach or recognizing the need to re-evaluate. For example, if you’ve fallen into routine, is it time to take a fresh look at the market? If you are cautious after being unsuccessful in the past, do you know the risks of that market event happening again? Do you buy a certain way to follow your company’s policies or is there flexibility to try something different?
- How long have you been using this strategy?
Next, take a look at how long your company has used this strategy:
- Have you relied on the same strategy for too long? The market has experienced rapid changes in recent history. The U.S. is exporting natural gas to other parts of the world and even set a production record in the first two weeks of 2018. The price of coal and oil don’t necessarily correlate to natural gas performance as closely as they once did. Also, natural gas prices aren’t greatly impacted by hurricanes due to the geographic diversity of production in the Northeast versus 2005 when the Gulf of Mexico production was greater.
- On the other hand, do you switch strategies before they have the chance to play out? Adjusting your strategy to what is currently happening in the market may leave you exposed to risks of what could happen in the future. A reactive approach could leave you feeling the impact of unexpected volatility.
Consider a blended approach. The energy market is heavily influenced by weather, and in recent years, the growth rate of shale gas. Both are hard to predict and hold surprises. A blended solution of fixed and index can help you optimize weather and market-driven opportunities.
- Is this strategy meeting your goals?
If your goals do not align with your strategy’s past performance, then it may be time to reassess. Don’t expect your strategy to win every time. But, if you find your strategy isn’t working out, recognize it isn’t working out – no matter how long you’ve used it or where it came from. If you’re already a Constellation customer, we have some tools to help you with this assessment:
- Review your usage and position reports in Energy Manager.
- Ask us about a custom Invoice Summary Report to review year-over-year performance.
- Request a back test of managed energy strategies to compare different options and how they performed in different points in the market.
If you went through these questions and found room for improvement, here’s one option to help get you started:
Strategize for both Groundhog Day outcomes:
Since we can’t predict what the market will do, you can structure your natural gas strategy to plan for different possible market outcomes:
- Fix 50% of your dekatherm volumes if he sees his shadow (we’ll see 6 more weeks of winter).
- Float 50% of your dekatherm volumes if he doesn’t see his shadow (we’ll see an early spring).
Why a 50/50 Strategy?
Diversifying your strategy helps better prepare you for the forward market, no matter what it does. Spring usually means warmer weather, which translates to less demand and a drop in gas prices. If you’re floating half of your volumes with the market, you have a good chance of catching some market downturn. On the other hand, if winter drags on, that generally indicates that we might see an increase in demand and prices. In that case, you’ve locked some volumes in early and won’t feel the full impact of price increases. Splitting it 50/50 is a simple, diversified strategy that can help you mitigate risk.
We use all kinds of things to try to predict the future… even furry fortune tellers in Pennsylvania. Instead of placing bets, consider developing a diversified energy strategy. Find out how Constellation’s SmartPortfolio can provide you an easy and complete approach for managing natural gas supply costs while protecting against price volatility.
Guest Author: Jennifer Lowe, Product Manager – Natural Gas
Jennifer is a member of Constellation’s Portfolio Management team, which oversees all product offerings for commercial and industrial customers. The gas products team focuses on the maintenance, operations and reporting of Constellation’s managed and transactional products, including SmartPortfolio, Manage Portfolio Service and Minimize Volatile Pricing. They also drive the innovation and development of new purchasing strategies to help natural gas customers manage risk amidst a growing and changing market. In 2017, Jennifer spoke at multiple gas customer conferences and continues to work alongside the sales team to help find the right strategies for customers.