Even though flipping a coin has better forecasting skills than the dastardly groundhog, Punxsutawney Phil has unfortunately been on the money for this winter. Despite April on deck next week there is still snow on the ground (in more places than there should be), while our dearly beloved energy commodities have seen rampant demand, receding inventories, and rocketing prices. Henceforth are seven such examples:
1) As 2014 was welcomed in by a polar vortex, natural gas demand spiked across the eastern half of the US. According to Bentek, seven of the top ten highest days for US natural gas demand ever occurred in January of this year. Yep, EVER. February showed no let up, with many US cities experiencing some of their coldest years ever.
2) This increase in demand has meant a subsequent rally in natural gas prices. While January and February 2013 saw prompt month prices average $3.33, the same two months in 2014 saw prices average $4.44 (…spooky…). Heating expenditures for using gas this winter have accordingly jumped from $600 to $663 per household:
3) Wholesale spot natural gas prices for Boston (Algonquin Citygate hub) spiked to a record $80/MMBtu in late January as frigid conditions caused heightened demand, exacerbated by pipeline congestion into New England. Through February they still remained elevated when compared to prior years:
4) The inclement start to 2014 for the Northeast was reflected in higher demand for distillates, and specifically heating oil. After all, 80% of households that use heating oil to heat their homes are in this region. Hence as thermostats were ratcheted up, distillate stockpiles on the East Coast fell to an 11-year low:
5) As inclement conditions have ramped up, there has been a corresponding slowing in the US economy, and even contraction in some regions (New York and Philadelphia) due to the ‘unusually severe weather‘. As we know, all paths lead back to energy, hence after implied demand for gasoline in December was 3.3% higher than the prior year, adverse weather conditions closed schools, kept workers at home, and deterred even the most fervent shopaholics from driving to the mall. Hence gasoline demand in January saw a seasonally stronger retracement than usual.
6) As bitterly cold conditions have battered the Northeast and Mid-Atlantic, the spike seen in natural gas demand and prices has filtered through to record-high winter peak demand in day-ahead power markets also. Day-ahead on-peak power prices spiked well above $200/MWh at a number of hubs:
7) Another fuel source for home heating – propane – has been a victim of a viciously cold winter. In fact, propane stocks were already depleted as we entered the winter period after a late and bumper corn harvest required more propane than usual to dry the crop. A frigid start to 2014 then caused a supply crunch, leading to a temporary price spike. Fortunately prices have retraced recently as supply concerns have eased.
All in all, it has been a rough winter; the worst since the 1970′s. That said, such market moves and price swings are a stark reminder as to why energy risk management is needed (and, um, why I still have a job). All I hope for (as well as keeping my job) is that the coming days and weeks have some spring in their step…it’s been a long time a-coming. Rock on.
By Matt Smith