What’s Causing Volatility in the Markets?
Market volatility is seemingly settling in for the long haul as volatile Henry Hub natural gas prices—and as a result electricity prices—continue to rise. While no one can predict where prices will go as we head into winter, what we can do is take a closer look at what’s causing energy market volatility, as well as where to find viable solutions.
While the market has been in a period of declining prices for a number of years, no market can continue to go lower and lower. Currently, we’re seeing that play out with increased market volatility and increased costs. There are a few reasons behind that:
Increasing Natural Gas Prices: Natural gas prices recently hit a 13-year high, more than doubling in past six months. What’s more, the EIA predicts that the average home heating gas bill will increase by 30% as compared to last year.
Increase in Exports: Exports of natural gas and liquefied natural gas account for nearly 20% of the country’s natural gas production as prices in Europe and Asia continue to set records, reaching $35 per million British thermal units (MMBtu) in Asia and nearly $40/MMBtu in Europe in the first week of October.
Decreasing Storage Levels: With natural gas becoming a global commodity, natural gas storage levels in the U.S. dipped below their five-year average headed into the winter withdrawal season. Although pleasant fall temperatures reduced overall demand, current natural gas storage levels are 2.5% below the 5-year average and 9% below this time last year.
A key factor to keep top of mind is the fact that electricity is closely tied to natural gas. The general rule of thumb is that where natural gas prices go, electricity prices follow. Retail electricity prices are largely driven by natural gas prices, which are driven by several related factors, including supply and demand. We’re currently experiencing both rising demand and a tighter supply. A few factors contributing to caution on the supply side include:
Uncertainty as related to the pandemic: If COVID cases surge again, the global economy could once again weaken, leading to not only a decreased workforce for drilling, but also decreased demand.
Investor hesitancy: Even prior to the pandemic, trends were indicating a turn toward investor conservatism as it relates to oil and gas.
Renewables: While waning enthusiasm to expand gas production deepens, investors’ eye for renewable energy continues to increase, with the latter further impacting the former. What we’re seeing from a financial and credit perspective is investors are simply moving away from anything related to fossil fuels. That’s had a chilling effect on the amount of financial resources for the production of natural gas in the industry, which ultimately restricts supply causes both natural gas and electricity prices to increase.
What Can You Do?
While market volatility isn’t always a welcome turn of events, there are options for hedging against rising costs and minimizing budgetary risk.
Lock in sooner rather than later: One approach is to get out ahead of the market. Generally, we recommend that our clients at least test the waters of the market 12 to as much as 24 months before their existing contract ends. While we don’t know if prices will be higher or lower in the future, what we do know is energy market volatility increases as the start date gets closer, primarily due to the impact of weather.
Additionally, looking further out can be beneficial, as well. The “outer years” still represent a good buying opportunity and an effective way to combat higher near term prices.
Reduce demand: The lowest priced kilowatt hour is the one you don’t use. By reducing your usage and reducing your demand, you can take more control of your future energy expenses even though prices are high.
Explore efficiency and sustainability projects to increase resiliency: One of the trends we’re really seeing in the industry is a move away from centralized, utility-based generation to what’s known as distributed generation. This shift from a single source to many sources, oftentimes at the customer site or what’s known as behind the meter distributed generation, allows for increased resiliency. The end game of course is a greater level of reliability. Traditionally, if the central grid goes down, you have no real option to keep your facility open. But if you have solar with battery storage for example, you may be able to stay in operation until the grid comes back online.
A great place to start is by talking to the team at APPI Energy. Our data-driven approach coupled with our proven, 25-year history, allows us to provide custom solutions for navigating the ever-changing energy markets. To learn more and take advantage of this AFS Corporate Membership benefit, contact me, Drew Pangborn at 667-330-1164 or visit www.appienergy.com amd reference your membership in AFS by company name.