Energy Market Update: Factors and Trends to Consider this Winter

Guest Blogger: Alex Paciga
Communication Specialist, APPI Energy

As we move into the winter season, there are a variety of factors that will influence natural gas (and thus electricity) prices across the nation. Weather, production, and supply are likely the most influential factors on natural gas prices this winter. We’re expecting a cold winter, and though natural gas production is at record highs, we’re entering the season with historically low natural gas supply levels. Additionally, though it’s more a long-term factor than the preceding three, we must consider the effect that increasing natural gas exports will have on domestic prices. Winter is traditionally a time of price volatility and, generally, higher electricity and natural gas prices prevail during the colder months. As 50% of U.S. households and businesses are heated by natural gas, and the price of natural gas is directly linked to the price of electricity, everyone has a vested interest in understanding what the market is doing and will do during the winter season.



Unsurprisingly, the weather is the most influential factor on natural gas pricing this season.  Currently, NOAA is predicting a 13% increase in heating degree days year-over-year. The weather has been unpredictable throughout the late autumn, with cold snaps giving way to widespread warming, and vice versa. If we have a terribly cold winter, we may see prices climb to historic highs, reminiscent of the ’13-’14 polar vortex event. However, November proved quite mild, and there are no infallible predictions when it comes to figuring out the whims of the temperature. Overall, it can’t be understated that the market is severely weather-driven, and while other factors act as a balancer, we will see the market rise or fall by the thermostat.

Balancing the effect of the weather, natural gas production is currently at record highs, largely due to draw from the Marcellus/Utica Basins. Earlier this week (at time of publication), production in the Lower 48 reached an all-time high of 77 billion cubic feet per day (Bcf/d). While weather will continue to be the primary factor influencing pricing, sustainable growth in production could signal a bearish market after the winter heating season, and a more imminent drop in prices if weather proves mild this season. It should be noted that sustainable growth in production is exactly what the Energy Information Agency (EIA) is projecting, as 2018’s natural gas production is expected to be 4.9 Bcf/d higher than 2017’s levels, and with FERC having regained its quorum, new pipeline projects should be expected to come online within the next few years.

Despite the strong production, we are entering the season with the lowest natural gas storage levels since 2014. At time of publication, natural gas stocks were 7.7% lower than their year ago levels, and 2.8% below the five-year average. Most analysts view this as an adequate storage level, assuming normal winter weather and our current levels of natural gas production. Given that storage is largely a product of supply (which most closely relates to production) and demand (of which weather is a major driver), this factor shouldn’t be considered as influential as the components which drive it, but still should be observed as an indicator of any tips in the balance of supply and demand.

Of course, domestic consumption is far from the only driver of demand. Though a long-term factor, and not limited to the winter season, it should be noted that exports of natural gas are at record highs. Earlier this week, natural gas exports to Mexico reached an all-time high of 4.7 Bcf/d, pushing the U.S. into yet another record-setting 7.8 Bcf/d in overall exports. Liquefied natural gas exports, too, are expected to continue increasing, and are projected to increase nearly fivefold from 2 Bcf/d to 9 Bcf/d over the next three years. While not exactly a short-term trend, the increase to demand should be noted as a factor that places upward pressure on pricing.

In conclusion, weather will be the primary factor driving the natural gas market this winter. Weather prediction is no simple science, and a severe winter could escalate prices significantly. As such, it would be prudent to prepare for anything this coming season, and ensure that electricity supply contracts on any facilities are not due to expire during the season. Allowing a facility to be exposed to market-based rates creates significant risk of increased costs due to market volatility. APPI Energy can assist in reviewing your current supply contract. For more information, please call 800-520-6685 or visit our website at www.appienergy.com.

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