First things first, as an energy broker offering a fixed-rate energy contract to your customer, you must understand how the price of the contract is derived. Like any commodity or stock, electricity and natural gas have a futures market. That is, the future delivery of electricity or natural gas at a certain given time can be traded or agreed upon ahead of time.
We know that sounds confusing. Allow us to simplify things. Let’s say a producer of natural gas wants to gain some security knowing what his revenue might be for the next 12 months based on the total gas he is producing. That producer might enter into a futures contract with a buyer and agree that no matter the market price of gas for the next 12 months, he will sell it to the buyer at X price. That, in essence, is the basis of a futures contract. Here are a few key items you must know about energy futures to be a competent energy broker.
Read more about energy futures here.
1. Future Months Create Calendar Strips
When energy suppliers offer fixed-rate agreements to end-use customers, they too, are entering into futures contracts with producers on the wholesale market in order to guarantee their costs for the specific contract term. In the futures market, each calendar month has a specific price, and those prices are averaged to create calendar strips.
Typically, retail energy suppliers look to calendar strip prices when determining their costs for a fixed-rate retail contract. These strips move up and down each trading day with the movement of the underlying monthly contracts. Here is an example of the 2020-2025 NYMEX natural gas calendar strips. Note that these calendar strips reflect trading days May 7, 2019 through September 24, 2020.
You might also take notice to the quick increase in the 2021 calendar strip in March 2020 (represented by the turquoise blue line). As the pandemic came into full swing, future prices drastically increased.
Understanding how to access this data and interpret it will make you a more effective energy broker. You will understand what drives supplier pricing, where it might be going, and how to take advantage of future market dips.