Of the many things that move energy prices, weather is the most obvious of all. The equation is simple. Extreme cold in winter requires more fuel for heating, demand goes up, therefore price goes up. But not all temperature changes are as obvious as winter cold = high prices or summer heat = high prices.
Shoulder months (months between winter and summer) are often considered slow periods for energy price volatility. But even these calm periods can move the market. Unfortunately, this past April and May are good examples of how unexpected temperatures can alter market conditions.
You won’t be surprised to hear that outdoor temperatures are measured at thousands of locations around the country. But did you know that those figures are used to create a special metric measured by how much temperatures vary from a 65-degree benchmark? In winter these are known as “heating degree days – HDD” (degrees under 65) and in summer as “cooling degree days – CDD” (degrees over 65). The greater the number, the more heating or cooling is required.
In the tables below you can see the heating degree days for April and May and the cooling degree days for May. April was 36% colder than the five year average for the month, while May was 47% warmer. Additionally, May was so warm that it used 57% more cooling degree days than the five-month average.
So, why do we care?
We care because the temperature swings in these months have a direct impact on natural gas usage, stored volumes, and, ultimately, natural gas and electric prices. The combined effect of April and May 2018 produced an elevation in prices into a new and higher trading range (about a 3% increase). All supply bought for next winter is impacted by these months and will remain in place until the next market shift.
So What’s Ahead? El Niño, maybe.
Over the past few months, the surface water temperature in the Pacific has been rising and is heading toward an El Niño effect later this fall. So what does this mean for us? Simply put, it will create warmer weather in the north, creating a change in the jet stream that will reduce the impact (but not the number of) hurricanes. The overall effect of El Niño is a moderately bearish change (unless usage and prices drop). While the arrival of El Niño and its strength are still uncertain, we can definitely take away an important lesson from this spring: when it comes to weather, expect the unexpected.