Burner tip. Credit: Shutterstock
Natural gas prices for New Yorkers last February – particularly for commercial consumers – were the highest for that month in four years.[1] But by this past November, prices were the lowest for that month since the early 2000s.[2] What’s going on? And what should you do about it? Allow me to explain.
We all remember the polar vortex: Last winter was one of the coldest winters in recent memory here in the Northeast. And, not surprisingly, when the weather is particularly frigid, our reliance on natural gas – which we use for both heat and electricity — skyrockets. Nationwide, we saw an increase of 10 percent above the norm in heating-degree days, a common weather-based measure of heating demand.[3] This means that we consume more than we can pump into the Northeast from the gas-producing parts of the country. As a result, we deplete our regional storage reserves of gas in the ground. Because the winter was so severe and so long, by the end of March, gas storage nationwide was 54% below the five-year average, and the lowest level since 2003.[4] In fact, short-term supply of gas was so scarce in January 2014 in New York that local monthly prices spiked to six times the usual price.[5]
As a result, by the late winter, traders of natural gas – who collectively set prices on the open market — perceived risk for the coming year. In short, speculators saw the big storage deficit and drove the price up. (I should note, though, that prices are still relatively cheap in historical terms because of the shale gas revolution, which is flooding the market with lots of additional supply – a topic for another post.)
But things changed in a hurry. We had a mild summer, which helped keep our “summer burns” down. By this I mean that the mild weather moderated electricity use, which is highest when it’s really hot, which in turn means we burned less gas to power the grid. Because natural gas is now widely used for electricity generation and not just for heating, the summer season is important. And because gas use was relatively low, supply overtook demand. This helped us to rebuild our storage faster than expected: We went from a 50% deficit below the five-year average to 2-3% surplus in the national and regional market. 8
On top of that, there are three other structural factors that have contributed to rebuilding supplies and low prices. First, the gas from shale gas formations in Appalachia has kept on flowing, and new pipelines are increasing shipments to our market.[6] Second, our consumers are getting more efficient “at the burn tip”, using less gas in their homes to produce the same heat and hot water.[7] And, so far, we have had a slightly-milder-than-average winter. As a result, prices have drifted downward significantly.
Will low gas prices persist? There’s no one out there who knows what this market is going to do on a forward basis. But because prices are low, it’s a good opportunity to exercise a fixed price option.
Matt is an energy management and procurement executive with over 20 years of experience in developing energy management plans for small business entrepreneurs, product development, business operations, and strategy. With an appreciation for the energy industry’s volatility, Matt enjoys the challenge of remaining nimble and reactive to the market, with the ability to adapt and overcome challenges and shifts in the paradigm swiftly. Headquartered in New York, Matt is currently President and CEO at Great Eastern Energy (GEE), an alternative energy supplier of natural gas, electricity and energy solutions in NY, NJ and MA. For more information, please visit www.greateasternenergy.com.
[1] http://www.eia.gov/dnav/ng/hist/n3020ny3m.htm
[2] http://www.bls.gov/regions/new-york-new-jersey/news-release/averageenergyprices_newyorkarea.htm
[3] http://www.eia.gov/forecasts/steo/special/pdf/2014_sp_03.pdf, p. 10.
[4] http://www.eia.gov/forecasts/steo/special/pdf/2014_sp_03.pdf, p. 7.
[5] http://www.eia.gov/forecasts/steo/special/pdf/2014_sp_03.pdf, p. 10.
8 http://www.eia.gov/forecasts/steo/special/pdf/2014_sp_03.pdf, p. 10.
[6] http://www.eia.gov/todayinenergy/detail.cfm?id=18931
[7] http://www.eia.gov/pub/oil_gas/natural_gas/feature_articles/2008/ldc2008/ldc2008.pdf, p. 7.
8 http://ir.eia.gov/ngs/ngs.html, p. 8.
