Purchases can be made too soon, too late, or just right
Everyone is familiar with the saying, “Timing is everything.” It is true that most endeavors benefit from proper and deliberate timing, and energy procurement is no exception. It can be done too soon or not soon enough, especially when large quantities are being secured months in advance.
When buying energy for future use, the not-soon-enough scenario arises when current newspaper and TV headlines affect buying decisions.
Any number of things that pop up in headlines — local regulations change, a nearby power-generation facility is phased out, a severe winter is predicted — can influence the way the energy market is perceived. In turn, market price can reflect minor and short-lived changes.
Often, media “noise” is created by energy producers in an effort to artificially inflate prices. In an interview, you may hear, “Yes, there is still surplus gas in storage over last year, but that surplus is shrinking.”
The point the interviewee is trying to make is that the surplus supply compared with last year is slowly getting smaller, and in a month to six weeks, it may be gone. But even if that happened, storage still would be very full, and there should be no effect on price. Nonetheless, the statement can create a sense of urgency, spurring buyers to enter into a contract at a time that is not ideal.
The subject matter of the “noise” will determine how far out it will affect energy prices. A small noise may last only a few days. A big one (like a long heat wave or cold spell) may last a month or so.
The too-soon issue is more tangible and less open to personal interpretation. Energy traders simply place a premium on energy futures. Lock in too early, and you are going to pay for it. For example, the market price for natural gas in April was $1.90 per decatherm. That price is for gas delivered in April.
What a surprising number of people do not understand is that you cannot buy winter gas in April for $1.90. The premium set on winter gas means an actual delivered price of $3.05, if purchased in April. But the actually monthly prices for last winter averaged $2.75.
This year, the current market has pushed winter prices up to $3.43, and we are recommending that our clients wait until autumn for the premium to fall and for prices to return to around $3. If we have a cold winter, actual prices will average higher than $3; if it is warm again, the average will be $2.50 to $2.75.
As you can see, rather than paying the extra money for buying so far in advance, you can wait until the winter premiums come off between August and October. These premiums are priced into the market by traders, not suppliers. As you get closer to the actual months, the traders see less of a chance a bad event will happen, and the price falls.
It is unlikely that you will secure winter gas at an April price; however, you may be able to lock in at a price lower than what you would pay in April with the premiums attached.
As a rule of thumb, buying energy is best done after seasonal premiums come off and before current-events “noise” picks up.
Tod Sherman is president and chief executive officer of Tybec Energy (www.tybecenergy.com). Tybec Energy is an independent energy solutions company that has more than 70 years' combined experience working with and for natural-gas and electricity providers. Based in Lititz, Pa., but serving the entire mid-Atlantic region, the firm helps industrial and commercial companies keep energy costs under control. Sherman can be reached at 717-823-6505 or by e-mail at email@example.com.
For previous Managing Your Facilities columns, visit www.hpac.com.