This graph is not as complex as it looks. It shows electricity and natural gas wholesale prices (12-month future strips) for 6 years from 2011 until now and gives us a useful framework for understanding how energy markets work.
U.S. domestic energy prices are especially difficult to predict because there are always at least 10 different factors affecting them – 10 Factors That Affect the Cost of Energy
This graph shows peak electricity prices in dark blue, average electricity prices in light blue and natural gas prices in black. In S.E. PA, more than 30% of all electricity is generated using natural gas as a fuel, so gas prices tend to ‘drive’ electricity prices, and all 3 graphs tend track closely.
- In 2011 you can see the flow of shale gas coming onto the market driving prices steadily down to a 5-year low point in April 2012.
- At this point the gas producers said they couldn’t make money, so they capped some wells and the price went up steadily for the next 2 years.
- Then, in 2014, the Polar Vortex Winter affected prices drastically for a full 6 months.
- This was followed by a warmer Winter in 2015 – with a single short-lived peak in October, but otherwise a mild winter, followed in 2016 by a warm
- On the gas side, prices fell steadily from January 2014 through January 2016 to a new low – below the 2012 low – for several reasons…
- Global oil prices fell from $100/barrel to $40/barrel.
- The economy was sluggish, so demand was weak.
- Shale gas producers became more efficient per well drilled.
- Also, notice that for the whole of 2016 the bond between electricity and gas prices became ‘uncoupled’. Natural gas prices rose by 50% in 2016, though starting at a very low level, while electricity prices were relatively constant. While there was a surplus of NG at the end of the 2015 Winter…
- Natural gas-generated electricity hit record levels and by Summer’s end
- Expectations for a colder 2016 Winter drove natural gas prices up.
- Significant Exports have begun from LNG plants in Louisiana and Maryland to Mexico, S. America and Europe.
Natural gas prices showed the largest rise in 2016 — prices rose nearly 60 percent — even though prices began the year very low. Excess natural gas at the end of 2015 and warmer winter weather kept prices low at the start of 2016. But the summer of 2016 reversed the trend–natural gas-generated electricity hit record levels and by summer’s end, expectations for a colder winter drove natural gas prices up.
What does this mean for you?
- For electricity prices, it means that the market is (a) stable and (b) very attractive, since it’s only marginally above its historic low of 2012. We recommend 2 actions – (a) consider buying NOW even if your contract doesn’t renew until 2018 or 2019, and (b) buy for as long as you’re comfortable with, and lock-in the excellent savings on offer.
- For gas prices, after a 30% increase in 2016, it looks like now would not be the best time to buy, BUT, if you compare current market levels with those in 2012, you’ll see they’re not far apart. It’s certainly possible that gas prices will fall again, but probably not as low as in early 2016, so it’s STILL a good time to buy in historic pricing terms.
- For future prices, both electricity and gas are expected to be relatively flat for the next 3 years, indicating that the market doesn’t anticipate any major moves upwards or downwards, BUT remember that the Polar Vortex wasn’t expected either! Our advice is to lock-in current favorable prices for as long as you reasonably can and minimize your market exposure/risk.