Energy Futures Markets.
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.
2. Peaks and Shoulders
Another key concept to understand is the market price trends around peak months and shoulder months. Energy marketing pricing, in the short term, is largely based on supply and demand. Because colder and warmer temperatures can create added demand for energy, summer and winter months typically have higher prices.
As evidenced by the chart below, energy futures typically trade at higher prices December – February and June – August. These seasons have higher anticipated demand and speculation in the market reflects this.
Seasoned energy brokers know how to structure retail energy supply contracts to take advantage of lower-priced shoulder months. In fact, you might even notice in supplier matrix pricing that contracts ending in May or November have lower rates. The reason for this is that those contracts are capturing one more shoulder period and have a lower net cost to the supplier. Here are some tips for utilizing shoulder months to sell lower-cost energy to your customers.
Pro Tips
- Sell sweet spot terms that have more shoulder period than peak periods
- Lock-in peak period prices that typically have high volatility, and float shoulder periods (see more on block + index pricing here)
3. Less Volatility Out The Curve
To fully understand the difference between energy spot prices, energy future prices, and what affects the two, one must understand the make-up of the futures curve.
Since each future calendar month has an individual price, when you align them together, you get a futures curve. It might look something like this:
The first month of the futures curve is the most recent month, or “front month”. When you hear about natural gas or oil prices on CNBC, they are referencing the front month contract. This contract is heavily impacted by market fundamentals, such as supply and demand.
When you move further “out the curve”; however, those monthly contracts are less affected by short-term market fundamentals. In fact, when you look several years out the curve, futures prices have very little volatility when compared to the front month contract.
Energy brokers can take advantage of this market phenomenon by future-dating retail supply contracts for their customers. Just because current market prices are high does not mean that there isn’t opportunity further out the curve to save your customers on their energy costs.
