Extreme Cold Sends Natural Gas Markets Scrambling for Direction


What does all this frigid cold mean for your energy bills?

Last week, natural gas prices were almost 40 times higher than they have been.  While that high a price won’t persist, it is reasonable to expect that energy prices are going to be higher than they have been for the last few months.

Want a better understanding of the ups and downs of the energy markets before another blast of arctic cold arrives? Here’s a memo from the desk of Dan Levin, VP Energy Markets, explaining how this recent cold front has impacted markets.

We often hear from our clients that controlling their winter utility costs can be one of their biggest challenges. This past week’s weather and its impact on prices is an excellent example of why they may feel that way. Understanding the ups and downs of the energy markets (and prices) is difficult enough, but when it comes to events like bombogenesis or “bomb cyclones,” things can get really crazy.

In fact, last week we saw energy prices both rise and fall at the same time! Now to be honest and fair, we are talking about two separate “markets”: the national NYMEX natural gas futures market that moves with longer-term expectations and a price for natural gas needed specifically on that day in the local NY market.

On January 4th, the spot price (daily cash price) for NY set new records reaching $175/DTH. Most of our clients contract for fixed price natural gas in New York somewhere between $4.50/DTH to $5.75/DTH, and fortunately for them, they will not be impacted by the recent January price volatility.

10 Highest Daily Top of the Range Prices for Transco Zn 6 NY

You may also notice in the above chart, that seven of the ten highest prices fell within the past three years and coincide with the 2014 polar vortex cold period.  All of the peak days in 2014 lead to natural gas utility supply rates of $8 or $9/DTH that winter. That’s what usually happens. Except for last week. The temperature extremes of the past few years coupled with the high demand in the NY market are a recipe for price volatility and the reason all our clients are hedged or have fixed agreements that protect their winter costs and budgets.

At the same time local prices were setting record highs, the futures market dropped. Despite the extreme cold in the near term across the whole US, the natural gas futures contract for February 2018 saw 7.5% price volatility and a daily price drop of 4.7%. While it is unusual to see large market movements like these in opposite directions, it can happen and it did here for good reasons. In short, the prices dropped for February and many of the forward months, because natural gas production has seen large increases over the past few months, changing market expectations. It is also an indication that we may see low prices once the winter has passed and the high natural gas production levels increase natural gas supply.

Natural Gas Futures

With clients across the US, it’s important to talk about region-specific strategies.  We welcome market discussions with our clients as well as discussions on your specific procurement strategies.

Send any questions to procurement@brightpower.com.