Why You Should Hedge Now for Winter Months
Natural gas storage reserves recorded its first triple-digit October injection since 2014. The 104 Bcf injection also erased the deficit to the 5-year gas storage average. With warmer than expected weather, storage numbers are expected to increase for the next couple of weeks. Gas prices did not react much to the news, hovering around $2.30/MMBtu for a November month contract. Both the winter strip (NOV 19-MAR 20) and CAL 20 saw slight decreases in values. Average peak power prices in Zone J NYC averaged $21/mWh this week.
Now that we are in the middle of October, preliminary winter weather forecasts are beginning to roll in. From what we have seen, this winter is expected to be on the milder side. This should lessen the demand for both natural gas and electricity for heating – providing stability in pricing for both commodities. Since these forecasts are not a guarantee, if you are not on a fixed product and already considering making a hedge for the winter months, now would be the time to execute a contract.
Natural gas pricing plays a key role in electricity power pricing due to the increasing reliance on natural gas-fired generators as nuclear, coal, and oil generation is retired and mothballed. As the marginal unit of generation, gas prices are directly correlated to power pricing (more so in some regions such as NYC vs. others such as parts of PJM). We keep an eye on natural gas market fundamentals in order to provide insights into forward power pricing for our clients. Gas production has grown and surpassed any speculation that production would not be able to keep up with demand due to LNG and Mexican exports.