Navigating Market Uncertainty
As buildings prepare their 2023 budgets, it’s important to take stock of energy market conditions and their effects on every manager’s bottom line. More critical than the actual numbers is the need to understand why they are moving. Given the political and economic drama on the world stage, it should come as no surprise that buildings should brace for higher costs of electricity, natural gas, and fuel oil (if applicable) this year. But the degree of these increases is not in line with the overblown hysteria portrayed in the media.
Anyone who lives in the Northeast knows that Christmas Eve 2022 delivered bone-chilling cold. Moreover, residents in areas serviced by Con Edison, National Grid, and other utilities received messages in the late evening hours begging them to conserve power. Regional prices of electricity and natural gas climbed to record levels, though contrary to what was portrayed, their ascent was short-lived. The combination of warmer temperatures and strong stockpiles soon pushed natural gas to an 18-month low, which helped to reduce the price of power. Additionally, one of America’s key liquefied natural gas (LNG) plants has been sitting idle, leaving extra supply on the open market that lowers costs for other buyers. In just a few days, the Christmas cold and eye-popping prices had come and gone.
This trend is not just domestic. Only a year ago, Europe’s energy market was in structural shambles due to the conflict in Ukraine and supply shortages. Now, benchmark prices for crude oil and natural gas have sunken below pre-war levels. When Russia shut pipeline access, the EU began importing LNG from America and accumulated sufficient reserves to keep the lights on and heat flowing. The same mild winter conditions, along with Europe’s rapid pivot to LNG and commitment to replenish storage, allowed the continent to avert a crisis.
Energy prices may not be out of the woods yet in 2023, but New York City buildings do not have to remain at their mercy. Most importantly, they should not rely on the utilities for their electricity and natural gas supply. Con Edison, National Grid, and similar firms provide no price certainty, consistency, or transparency: they leave properties completely exposed to commodity market fluctuations. Electricity and natural gas supply prices from the utilities are at some of the highest observed levels in over a decade. Only through third-party supply agreements can New York City buildings mitigate their energy costs and enhance budget certainty.
The year 2022 has ended and building management must focus on balancing their 2023 budgets. Yes, it is true that last December and January endured unprecedented price spikes due to macroeconomic conditions and political unrest. But it is also true that these spikes quickly subsided and market conditions smoothed over. Moreover, there is no evidence that short-term conditions will materialize into long-term trends. Every year brings its own dose of price instability, but managers should feel empowered to protect their buildings in 2023 by locking in energy supply costs, avoiding costly utility rates, and staying informed.
Market Analysis
Electricity
Thanks to mild weather and lower fuel costs, electricity prices for New York City enjoyed a relatively stable January. Without winter cold, power plants could procure natural gas – their top source for generating electricity – at reasonable prices. In a month that is often rife with volatility, NYISO Zone J remained in the $0.03–$0.04/kWh range – far lower than the near $0.20/kWh experienced during last month’s severe cold snap.
Natural Gas
Natural gas prices took a mighty tumble in January, chiefly driven by conditions in the U.S. market. Warmer-than-usual temperatures have been unable to stoke a significant spike in American demand. NYMEX-traded futures plummeted from $4.40 to the low $3 range on news of healthy inventory levels and a market surplus. Still, America has several months of winter ahead, and the commodity’s next move is anyone’s guess.
Crude Oil
Despite dropping off a table days after the new year, crude oil prices spent January reclaiming lost ground from late 2022. Concerns over a slowing economy weakened the commodity early in 2023, sending it sliding to $72/barrel. However, global optimism soon rose on the positive outlook of surging Chinese demand. By month-end, crude hit a 7-week high as markets prepared for China to resume imports. The fragile state of the global economy, however, weighs heavily on oil’s performance.
💡 Mitchell’s Tip: Work to reduce your carbon footprint.
