“Bomb Cyclone” Highlights Need for Energy Risk Management
For many on the east coast, the end of 2017 brought more than Yuletide cheer and presents. A weather event called a “bomb cyclone” brought over a foot of snow followed by weeks of cold weather that ticked new record low temperatures in many of the northeastern United States. Many states experienced temperatures 20-30 degrees below normal and strong winds plunged apparent temperatures even lower.
As icy conditions lingered, power outages struck tens of thousands of people and heating demand for natural gas strained the distribution system to its limit. The result was record high natural gas demand, record high natural gas prices at several eastern trading hubs, and correspondingly high electricity prices in areas reliant on natural gas as a primary fuel for generation.
The severe weather event harkens back to early 2014, when a downward shift in the “polar vortex” brought similar weather conditions to the U.S. and similar turmoil to eastern energy markets. Then too, the natural gas system was stressed due to prolonged above-normal heating demand, gas prices spiked, and energy prices followed suit. The 2014 event left many unsuspecting energy companies financially wounded or bankrupt. This year will be no different.
Companies with unprotected short positions in natural gas or power can be bankrupted in a matter of days when these severe weather events occur. To put the extreme prices in perspective, late December 2017 forward contracts showed the expected price of January gas at the Transco Z6 hub in NY to be around $6. However, on January 4, 2018 prices traded as high as $175, an almost 3000% increase above the prior expectation! Imagine if, just for one month, your mortgage payment suddenly increased by 3000%, turning a $2000 monthly payment into $60,000.
For energy companies exposed to volatile natural gas and electricity spot markets, the way to protect against “bomb cyclones” and “polar vortexes” is by savvy financial hedging. This means taking financial positions in the market to offset some or all of their expected market exposure, locking in rates or providing optionality to protect them when prices take a turn for the worse. In turn, understanding “expected future market exposure” can be complex and requires rigorous analysis accounting for a company’s unique portfolio of contractual commitments, physical assets, and in-place financial positions.
At cQuant.io, we’ve built an energy analytics platform with easy-to-use models that can help companies protect themselves from adverse market events. Our web-based interface is always available and provides access to powerful analytic models that let you understand your portfolio’s market exposure and take steps to mitigate your risk. With both a “polar vortex” and a “bomb cyclone” in just three years, don’t let the next buzzword-worthy weather event destroy your company’s future. Contact us today to learn more, or visit us on the web at www.cquant.io