Energy Price Forecasts

What Are Energy Price Forecasts?

Energy price forecasts are predictions about future prices of various energy commodities, such as crude oil, natural gas, coal, electricity, and renewables. These forecasts are typically developed using complex models that consider historical data, current market trends, geopolitical events, weather patterns, and economic indicators. Energy price forecasts provide valuable insights into potential price movements, helping stakeholders anticipate changes and adapt their strategies accordingly.

Why Are Energy Price Forecasts Important?

Strategic Planning and Budgeting

Energy price forecasts are vital for businesses and governments to plan and budget effectively. For companies in energy-intensive industries, such as manufacturing, transportation, and agriculture, understanding potential energy costs helps in setting budgets, managing cash flow, and ensuring profitability.

Risk Management and Hedging

For traders and energy companies, energy price forecasts are critical for developing hedging strategies. By predicting price movements, they can lock in prices or use financial instruments like futures and options to mitigate the risks associated with volatile energy prices.

Investment Decisions

Investors use energy price forecasts to evaluate the viability of investing in energy projects or companies. For example, a forecast predicting a rise in crude oil prices might encourage investment in oil exploration and production companies, while a forecast indicating falling prices might suggest caution.

Policy Making and Regulation

Governments and regulatory bodies rely on energy price forecasts to develop policies and regulations. For instance, forecasts of rising fossil fuel prices might accelerate the push towards renewable energy adoption and infrastructure development.

Example Case: Optimizing Energy Costs, Managing Risk, and Enhancing Operational Flexibility Using Natural Gas Price Forecasts

In this example, we illustrate how a producer can optimize energy costs, manage risk, and enhance operational flexibility using the price forecasts for THE Natural Gas Quarter (EEX) and PEG Natural Gas Quarter (EEX).

Consider a large agricultural processing facility in Europe relies heavily on natural gas for heating, processing, and power generation. To manage costs and ensure a reliable energy supply, the facility needs to plan its energy procurement strategy for the upcoming months. With the flexibility to source natural gas from different markets—specifically, the THE (Trading Hub Europe) Natural Gas Market and the PEG (Point d’Échange de Gaz) Natural Gas Market—the facility must navigate differing pricing and availability conditions to achieve the best outcome, see figure below.

Analysis of Forecasted Trends

The price forecasts in the image display expected trends for THE Natural Gas Quarter (EEX) and PEG Natural Gas Quarter (EEX) from May 2024 to February 2025. The forecasts include a confidence interval that provides a range of potential price movements, allowing for better risk assessment and decision-making.

• THE Natural Gas Quarter (EEX) (blue line): The forecast shows a slight upward trend with some volatility, suggesting that prices may stabilise toward the end of 2024 but could rise again in early 2025.
• PEG Natural Gas Quarter (EEX) (green line): The forecast follows a similar pattern but generally predicts slightly lower prices than THE for most of the period.

How the Producer Might Use These Forecasts

Comparative Analysis of Price Forecasts

The producer compares the forecasted prices for both the THE and PEG markets. Noticing that the PEG Natural Gas Quarter is expected to be slightly cheaper than THE Natural Gas Quarter for much of the period, the producer identifies an opportunity to reduce costs by purchasing more natural gas from the PEG market.

Strategic Hedging and Procurement

Hedging against price increases is essential as the forecast suggests potential price rises for both THE and PEG markets toward early 2025. To mitigate this risk, the producer decides to hedge by purchasing futures contracts for PEG Natural Gas Quarter (EEX) in mid-2024 when prices are still relatively low. This strategy locks in lower prices and provides a safeguard against future price volatility.

Additionally, by leveraging market differences, the producer might choose to increase their natural gas supply from PEG, which is consistently forecasted to have lower prices, and reduce reliance on THE, especially during months when THE prices are expected to spike. This approach helps the producer achieve cost savings by capitalising on the price variations between the two markets.

Operational Flexibility and Cost Management

Switching between markets is a key strategy for the producer, who has the flexibility to source natural gas from either THE or PEG. The producer plans to adjust their procurement strategy, choosing between THE and PEG depending on which market offers the better price at any given time. This approach allows them to minimise costs while maintaining a stable energy supply, which is crucial for uninterrupted agricultural operations.

Storage optimization is another strategy the producer can employ. If forecasts predict higher prices toward the end of 2024, the producer could purchase and store additional natural gas from PEG during periods when prices are expected to be lower. This strategy helps avoid higher costs later and optimises the timing and cost of natural gas purchases.

Disclaimer: Factors Affecting Substitution

It is important to note that several factors affect the ability to substitute between different energy futures:

• Price Differential: The primary driver of substitution is the price differential between the different energy futures. Traders and buyers will look to buy cheaper alternatives and sell higher-priced contracts to maximise profit.
• Regulatory Environment: Regulations affecting energy trading, emissions, and cross-border electricity flows can influence the extent to which these energy types are interchangeable.
• Transport and Transmission Capacity: Physical constraints like pipeline capacity for natural gas or interconnectors for electricity limit how much substitution can realistically occur.
• Contract Specifications: Differences in contract specifications, such as delivery location, contract size, and delivery period, can also affect the ability to substitute one energy future for another.

This disclaimer highlights that while strategic use of price forecasts can optimise costs and manage risks, actual substitution decisions must consider these underlying factors that can limit or enhance flexibility.

Frequently Asked Questions (FAQs) About Energy Price Forecasts

1. What methodologies are used to create energy price forecasts?

Energy price forecasts use a combination of statistical models, historical data analysis, machine learning techniques, and expert judgment. These models consider a variety of factors, including past price trends, current market dynamics, geopolitical developments, and economic indicators.

2. How often are energy price forecasts updated?

Energy price forecasts are typically updated regularly, ranging from daily to quarterly updates, depending on the provider and the market conditions. Real-time data feeds and continuous monitoring of global events enable frequent updates to reflect the latest market information.

3. Where can I find reliable energy price forecasts?

Reliable energy price forecasts can be obtained from various sources, including government agencies (e.g., U.S. Energy Information Administration), financial information providers (e.g., Bloomberg, Refinitiv), commodity exchanges (e.g., NYMEX, ICE), and specialized platforms like Vesper’s commodity intelligence platform.