When it comes to energy prices it’s always the known unknown (that bad things eventually happen) that take us all by surprise.
It’s hard if not impossible to predict future energy prices. Daily, weekly, monthly and longer term forecasts based on market fundamentals are at best only a theory based on “known” fundamental supply and demand issues. For probably 18-24 months, some commentators who dared to predict electricity and gas prices have been saying “buy now” prices can’t get lower, despite supply and demand indicating otherwise.
However, what often makes these forecasts and insights finally come true is not the “known fundamentals” but the “known unknowns” that over time inevitably bad things happen. In 2010 the largest spike in energy prices was triggered by a tsunami that took out the Japanese Fukushima nuclear plants and had the ability to make “economic waves” globally by increasing Asian demand for LNG and prompting Germany to close down their nuclear operations prematurely. Not one single commentator at the time could have predicted this chain of events. See chart above to see how this triggered the 2011 energy spike.
The low electricity and gas prices since the start of the 2016 year were always more susceptible to a “known unknown” event (low prices = increased jitters). The fire in Alberta has stopped oil production by 500,000 barrels a day. Perhaps not globally significant (0.5% of global production) but enough to spark an uptick in oil and subsequently trigger spikes in gas and power markets worldwide.
The fallout is not entirely clear but often when bad things happen, they don’t happen in isolation and other fundamentals across the energy sector such as drop in production, drop in imports (i.e. Norwegian maintenance issues), LNG cargoes being stalled or coal export restrictions for inter-continental purposes by the Americas. These potential issues during a “known unknown” event have an amplified impact on markets. By luck or design it does seem we hear more of these sub plots during a major “known unknown” event as well.
However, we don’t know exactly how big an impact Alberta will have or how long it will last and what other triggers it could set off. My advice is to take a deep breath and don’t panic buy and don’t dwell on what might have been.
A market like this still presents opportunities as the market will likely fall back into a deep contango as well. Meaning that because short term supply is still strong and demand (particularly for gas) over the summer will drop the opportunities to make purchases closer to the period of consumption (day ahead or month ahead) will eventually offer good value. Even during the Fukushima spike, the month ahead price offered better value by comparison. And this is a good way to ride out the storm and wait until price fundamentals offer better long term positions.
One thing is for certain, bad things do eventually happen and take everyone by surprise. The Alberta fire will be hopefully short lived along without any long term upward market sentiment. Either way don’t panic as you can always adjust your buying strategy.
Ben Dhesi is the Managing Director of Pulse Business Energy voted Energy Buyer of the Year at the 2015 Energy Awards.