Energy Risk Management Considerations this Summer
In an article titled “Summer 2015 Weather and Energy Outlook,” the Energy Market Exchange (EMEX) advised that natural gas and power prices have fallen substantially in the past year, but prices cannot fall much further. From a retail buyer perspective, there is far more risk that prices will rise significantly. The post discusses natural gas supplies and prices, weather and power prices.
Prices are approaching a floor of $2.25 to $2.50 per MMBtu below which it will not be profitable to produce natural gas. Data from the Energy Information Administration (EIA) showed Henry Hub prices of $2.75 per MMBtu as of May 6. With fewer rigs in operation, says EMEX, prices are likely to stabilize and ultimately increase to a range of $2.50 to $3.25 per MMBtu.
EXEM says summer weather will be hot and dry across the middle of the country and along the East Coast. Hot weather would likely lead to higher air-conditioning use, resulting in greater natural gas use and higher power prices in the Northeast, PJM and Texas, especially in highly populated regions with constrained power generation supplies. EIA’s Short-Term Energy Outlook for May shows that cooling needs will increase by over 6 percent this summer, based on forecast heating degree days.
Syracuse.com reports that the Farmer’s Almanac projects a hot summer in the Mid-Atlantic, North Central states (Great Lakes) and Southwest, while New England weather will be less extreme. Meanwhile, the Climate Prediction Center believes temperatures are as likely to be above average as below average across the eastern half of the US this summer. Both sources agree that warm, dry weather will persist across the West.
Wholesale power prices are unlikely to fall much further for two reasons, according to EMEX:
- Operation, maintenance and financing costs put a floor on power prices, regardless of how low fuel prices go.
- Many multi-year, fixed-rate power purchase agreements are based on higher natural gas prices from previous years. They will provide price support as long as they remain in effect.
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