Winter Recap: Turning Weather Volatility into an Energy Pricing Advantage

Logan Callen

Energy demand across the country will greatly decrease as we transition from winter to spring and moderate temperatures reduce the need for heating. After the multiple polar vortex arctic outbreaks during the 2013/2014 winter, where increased weather-driven demand highlighted regional issues for natural gas delivery across the East, there was little consensus about what the winter of 2014/2015 would bring. Some cooler weather in November caused speculative price increases to the wholesale natural gas market, but a weak December followed by an average January caused price decreases as the winter premium dropped out of the market due to lower than forecasted demand. In February, arctic outbreaks and storm patterns brought winter to the East Coast in an extreme fashion, providing pricing support in the wholesale natural gas market. At the same time, overall the United States saw the 19th mildest Dec-Feb since 1895, highlighting the extreme differences in weather patterns across the country.

According to the National Oceanic and Atmospheric Administration’s (NOAA) National Climatic Data Center (NCDC), this February the majority of northeastern states experienced the second coldest year on record since 1895. In addition to the cold, record amounts of precipitation fell, with Boston hitting all-time high at 108.6”. This cool February for the energy consuming East has increased demand, providing support for recent price increases. Current market expectations are that a slight dip in prices will occur as we move into more seasonal spring weather, and this will be followed by price increases at the start of the high-demand summer months. The window between winter and summer pricing may shorten if winter continues to linger as it is currently projected.

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West of the Rocky Mountains, we see a vastly different picture. California, Washington, Arizona, and Utah set all-time high average temperatures for February, with Nevada, Oregon, and Utah recording average temperatures in the top three. Consecutive dry years, combined with above average temperatures have reduced the snowpack and reservoir levels, as was covered previously.

Overall, the increased volatility in weather patterns has caused great uncertainty around energy demand. Meandering jet stream dynamics have caused the West to stay dry and warm, while the East remains cooler and wetter. The U.S. Energy Information Administration (EIA) is currently projecting natural gas prices to increase over the next couple of years after this current low due to a variety of factors including coal plant retirements, increasing liquefied natural gas exports, and other regulatory requirements. With prices near historic lows, the chance of an upward pricing trend is much higher than that of a downward pricing trend. Moving forward, clients who are looking to reduce future pricing risk should consider securing fixed energy contracts while the market is in a favorable window.

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The information in this page is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice.

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