Warm weather forecasts may have eased your concerns about winter price volatility, but there is still a chance for price spikes as we head into the winter.
We’re all thinking the same thing – with many weather experts projecting a warmer than normal winter, can you rest on your laurels through the holiday season? You might be thinking that with this warmth, and the generally lower price volatility in eastern markets, that there is only a small chance for prices to blow up as we approach year end. While your gut instinct might be correct, there is still some room for the market to move up and therefore, you should not mail it in as we approach December.
As it presently stands, a majority of weather forecasters anticipate a warmer than normal winter this year. Lower demand resulting from warmer conditions combined with increased supply in eastern power markets result in lower price expectations, with marginal prices likely to sit in a fatter portion of the supply stack indicating that prices should exhibit less volatility than normal.
The market has noticed this reality, and the overwhelming majority of forward power and natural gas packages are trading at or near the bottom of their historical range. Let’s look at the example of NYISO Zone J: The below percentile chart indicates where the specified term is trading relative to its 52-week range. We can see that Zone J has found the bottom for Dec-19 and is very near the bottom for Jan-20, showing that the market is not pricing a significant risk-premium anymore for these months. However, Feb-20 still has a premium baked in with Zone J near the middle of its 52-week range, around the 40th percentile mark.
You should ask, “Why isn’t Feb-20 trading near low points like Dec-19 and Jan-20?” Despite warm weather forecasts, the market will still price in a degree of uncertainty with some cold burst potential, as weather models often cannot anticipate an extreme polar-vortex type event until several weeks out. As we roll into December and the mid-range models get closer and more reliable at forecasting January and if the current weather view does not change as we get closer to February, we’d expect the package to trade off like Jan-20 already has.
Another major market, PJM Western Hub, has a fair risk-premium priced in for the entire winter. As we can see in the below percentile chart, it is currently trading between the 20th-30th percentile marks relative to its historical range, indicating the market isn’t yet convinced of zero volatility.
It wouldn’t be a complete winter view without looking into the current marks for ISO-NE Mass Hub. For the major New England hub, we are seeing a hefty premium placed on December. We’d expect this premium to erode if the warm indicators hold in the coming weeks, though this shows that there is still upside in this natural gas-dominated market which remains highly sensitive to weather fluctuations.
While the next few months may give you the impression the winter will be quiet, there is still opportunity to add value to your portfolio given current forward marks and lower premiums in some months as you look to clean up your winter positions. Market pricing could turn volatile leading up to the long Thanksgiving break so reach out to the TrueLight Portfolio Management and Pricing Team to help stay on top of the forward curves and best values each day to ensure you execute the optimal positions. Email us at email@example.com or give us a call at 617-209-2420!