Jamie Collins, Secure Energy Solutions

With regional summer wholesale power and natural gas prices falling to the lowest they’ve been since 2003 – the year that competitive electricity markets were launched in New England – many large commercial and industrial energy buyers are confronting a critical question:

Is it wise to lock in today’s pricing to cover outstanding requirements or should we wait to see if prices will drop even further?

Although it’s anyone’s guess as to exactly how market conditions will shake out over the coming months, three key considerations will ultimately drive the final outcome.

Weather Conditions

The first factor is weather. In mid-October, the National Oceanic and Atmospheric Administration (NOAA) released its U.S. Winter Outlook, favoring “above-average temperatures most likely in the West and across the Northern Tier.”

The driving force behind these forecasted conditions is this year’s El Niño, which NOAA says is “among the strongest on record.” Although El Niño is not the only factor influencing climate patterns this winter season, its impact on the Pacific jet stream will likely have a direct correlation as to whether natural gas prices rise or continue at near record lows.

A collapsed El Niño would result in much colder than anticipated temperatures, causing an increase in natural gas demand and an upward pressure on prices. The opposite would occur under persisting El Niño conditions as a lower than normal demand for natural gas puts downward pressure on prices.

Natural Gas Prices

The second consideration is the current oversupply of natural gas. According to estimates by the U.S. Energy Information Administration, working gas in storage reached 3,985 Bcf in the first part of November – breaking the record end-of-injection-season inventory high of 3,929 Bcf set in November 2012.

The nature of the coming cold season, coupled with the current oversupply, could cause short-term Henry Hub prices to go one of two ways – above the $3.00/MMBtu mark under a colder scenario or around the $2.00/MMBtu mark under a warmer scenario.

After the 2015-2016 winter season, longer-range prices will be driven by supply levels, market rules, and the success or failure of future infrastructure projects.

Completion of Current

Infrastructure Projects

The third issue is the current pipeline infrastructure. Simply put, resource access plays a critical role in pricing. The greater the availability of natural gas via pipelines, the less likely congestion-related price volatility will occur in the market.

Fourth quarter pipeline expansion projects in the Northeast will de-bottleneck existing infrastructure and significantly increase previously constrained production. Some analysts anticipate that this additional capacity could lead to a ramp-up in production – even as most indicators point to an oversupplied natural gas market. This, in turn, would result in a continued downward pressure on future prices. Furthermore, in regards to this winter, the Northeast has the benefit of the Everett LNG import terminal, which acts as a critical resource, bringing in much needed LNG during the cold season months.

In the end, the potential volatility of today’s natural gas market could shift current electricity prices up or down. A warmer than normal winter combined with added infrastructure in an oversupplied market could maintain a downward pressure on electricity prices, while a colder than anticipated season could inject a level of instability that boosts prices higher.

This dynamic energy landscape is making it increasingly critical for businesses to recognize and understand the risks, rewards, and opportunities associated with energy buying in the current market.

Knowing your organizational goals and drivers is key to determining which supplier best meets your needs. Talk with a broker like Secure Energy, who has extensive relationships with retail providers at the forefront of today’s changing environment. As seasoned energy professionals, we can help you understand the options, determine the right supplier, and build the best buying strategy for your business.

Jamie Collins is the senior vice president of business development for Secure Energy Solutions, East Longmeadow, Mass.