By Dan Cwalinski, Director of Contracts and Pricing
Whereas 2020 saw significant demand destruction and reduction in commodity pricing across the country, the story has been quite different in 2021.
Since the start of 2021, we have seen energy markets begin to recover, slowly at first and then picking up steam as vaccinations started to become available and people began to get vaccinated. That vaccination wave provided a glimmer of normalcy that had seemed all but lost and hinted at a larger overall economic recovery. During this time, we also saw winter storm Uri negatively impacted natural gas storage inventories. People thought about traveling again and many businesses re-opened or scheduled returns to the office targeting dates in 2021.
Through the Spring, demand continued to improve, and market forces picked up steam, compounded by inflation, which typically shows in commodity pricing first. June was the hottest June ever recorded in the contiguous US, according to the National Oceanic and Atmospheric Administration (NOAA).
In early July natural gas storage levels fell below the 5-year average, escalating prices further. At the current rate, storage levels are expected to be 159 BCF below the 5-year average as we head into withdrawal season. As of the end of summer, prices have continued to climb, most notably in the next year Calendar strips for 2022, particularly in the winter months. Some businesses have been forced to rethink their office re-opening plans as the Delta variant of the virus surged and are now targeting the start of 2022 for office re-openings.
There is not much in the market fundamentals we are currently seeing that would suggest much of a significant pull-back in pricing before this winter. Right now, the winter is forecasted to be a warm one with La Nina patterns detected, and this has already been accounted for in the rates you are seeing. The Covid recovery seems to be materializing as anticipated despite the recent surge in cases caused by the Delta variant. President Biden has also come out with a vaccine mandate, for all businesses over 100 people to require vaccinations. That said, a lot of the price pressure is coming from those winter months and if there is a pull back, those months will be heavily impacted. Since we are still months from the winter, forecasts are typically unreliable. While a colder winter than anticipated could cause prices to skyrocket further, a warmer one may allow prices to maintain or ease.
Even though you may believe the market has to pull back from current levels, timing of a market pull-back or correction is almost impossible to pinpoint. Businesses in need of deciding on their next commodity contract must weigh upside risk for further price escalation against downside rewards if the market does pull back. It has been some time since buyers have faced buying into an escalating market and this type of environment can be difficult to navigate.
If expiring contracts are forcing a decision, here are some options available to you. This is not an exhaustive list, but rather some ideas to consider:
- Skip the winter of 2021/2022 (Dec, Jan, Feb) in any contracts for now and shift your start date out to March of 2022 (or later). As utility prices for the winter are released, compare those prices to what you are seeing for competitive supply and make a decision at that point on what to do for the winter. Having the comparable numbers may help justify a decision either way.
- You could also look at hedging some of the non-winter months and watch the market for any buying opportunities in the winter months where you can layer in percentages for those months as you approach the flow dates. With fixed pricing so high, index pricing may be part of an overall buying strategy, where a certain percentage of your load remains tied to index pricing while other percentages are tied to a fixed price. Winters in the Northeast are historically volatile though and could wind up higher than a fixed price.
- Look at a short-term contract between 10 and 12 months and hope that something changes with the market fundamentals by the Spring.
Keep an eye on any further developments with hurricanes, natural gas production and exports, covid updates, and winter weather forecasts. If there is any significant news on any of those fronts, you are likely to see further price impacts to either the up or downside, depending on the news.
As always, Freedom’s Energy Advisors are available to review and discuss your best options.