EnergyWindow, Inc.: MarketElert(TM) - February 2004 Supplement: A Peek into the Futures

11/21/2008

EnergyWindow MarketElert ^TM - February 2004 Supplement

A Peek into the Futures

Gas prices have moved considerably higher in the past several weeks and, because so much of the electricity generated today uses natural gas, electricity prices have risen right along with them. This has resulted in many deregulated markets moving into a hibernation caused by default rates that were set during lower-cost periods. Suppliers and buyers alike would love to know when the markets will move and in what direction. Sources such as the Department of Energy's Energy Information Agency (EIA) and a host of consultants and analysts offer their opinions, but we can also get some good insight from the futures markets, where commodity traders turn information into actual transactions.

NYMEX Henry Hub Futures - 12-Month Strips Over Time

The graph above shows natural gas futures prices for 12-month strips over the past 10 months. And what story does it tell? Well, for one thing, the days of $2.80 gas are not expected to return for many years, if ever. NYMEX's Henry Hub gas futures, plotted for six years forward (see graph below), show that gas is expected to be in the $4.50 to $5.50/MMBTU range for a while. But, though prices will remain high compared to the pre-2002 era, they are expected to be lower for each of the years between now and 2009, a situation known as a "backwardated" market. In fact, Henry Hub gas futures closed at $5.41/MMBTU on February 9 for the next 12 months, while a 12-month strip for 2005 was selling for $5.19. The strip for 2006 went for $4.88 and the 2009 number was only $4.65. The same trend holds true for electricity futures. The NYMEX PJM West futures contract went for about $47.81/MWH for the next 12 months (on February 3rd), while the same commodity for calendar year 2006 closed at $45.44.

What does all of this mean to an energy buyer? First, for new contracts or renewals you may want to consider longer terms that capture some of the lower prices a little farther out, especially if you prefer fixed prices and can match or beat your budget. Second, for current contracts with some time left on them, you may want to see if you can "blend and extend" them or even begin seeking offers for contracts that begin in the future when yours are up. In any case, seeking multiple offers before making any major commitments is recommended.

EnergyWindow sorts through these complex issues and offers buyers insight and options to help procure and manage energy supply. For additional information about changing markets or procurement strategy, call EnergyWindow at 877-444-0086.