The cost of natural gas in the United States has more than doubled since this time last year. Considering that natural gas is used to generate roughly half of all power across the country, power prices have followed. In turn, the cost to operate an energy-intensive business or simply turn the lights on in your home is noticeably more expensive today versus the spring of 2021. How did we get here?
First, we must take a step back and consider the happenings of the last several years. In 2019, the United States became a net exporter of energy for the first time since 1952. Domestic energy pricing in the years leading up to this period had been relatively low due to an abundance of natural gas stockpiles. For reference, 2019 was one of the least expensive years to purchase energy in New England over the last decade. Investment slowed in the energy exploration and production space as the return on capital began to diminish. Then, the COVID-19 pandemic sent global energy pricing into a free fall due to widespread lockdowns and curbed consumption. Demand for energy globally was so low that oil prices dipped into negative territory. Energy production came to a halt.
The period of relatively inexpensive natural gas and electric commodity rates lasted until fall of 2021. At this time, virtually all COVID-era restrictions had been lifted and “normalcy” in day-to-day life had resumed. With this came the inevitable return of energy demand to operate businesses and manufacture goods. The tables had turned. Energy demand was now far outpacing energy supply and prices began to inch higher. A relatively mild December kept markets in check. However, January 2022 was colder than normal and sent electric pricing in major consuming regions to prices not seen since the Polar Vortex of winter 2013/2014.
Historically speaking, commodity prices tend to soften in late Q1 with winter weather in the rearview mirror. The market has a chance to replenish natural gas storage facilities before the onset of summer cooling demand. This year, we are unlikely to see the traditional spring ‘dip’ because much of the gas that would typically be allocated to domestic storage is being shipped overseas to help offset Europe’s current supply disruption and shift away from Russian energy imports.
One thing is certain: energy market volatility is here to stay. With a tightened supply & demand balance, even minor shifts in forecast or expected temperatures in a specific region can cause energy markets to fluctuate in a material way. It is becoming more critical than ever to align with a strategic, proactive, and trusted advisor to navigate this complex marketplace and mitigate operating costs into the future.
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