Understanding Energy Market Cycles
There are a variety of complex factors that come in to play with energy pricing. By understanding what impacts the market, you will be better equipped to make the right decisions for your business. Here, we’ll break down what to know when it comes to market cycles and other impacts specific to natural gas and electricity.
What factors affect prices in the energy market?
During typical market conditions, energy prices follow the principle of supply and demand—meaning the more demand, the higher the cost, as there is more competition for a limited supply. While the principles of supply and demand are central to price fluctuations in the energy market, there are other factors to consider. For example, government regulations can impact energy prices if new fees are assessed due to updates to equipment or changes in environmental standards. Additionally, Brent Rice, IGS’ staff meteorologist explains that “weather is a huge driver in the amount of energy we use on a day-to-day basis.” Analyzing weather patterns helps suppliers like IGS predict usage and ultimately understand potential impacts on the market.
Not surprisingly, natural disasters can create major impacts to the supply and demand curve and pricing to consumers, too. Whether fires or hurricanes, there can be significant effects when it comes to energy.
Without question, weather is one of the most significant factors when it comes to how the market behaves. This is evident when it comes to market cycles for both electricity and natural gas. Let’s discuss these specifics in greater detail.
Impacts on electricity market cycles
Unlike natural gas, electricity must be generated and consumed at the same time. Because of this, electricity pricing can fluctuate dramatically, depending on usage. However, there are some seasonal trends that the market tends to follow.
As the summer weather warms up and air conditioners are turned on, demand for electricity increases. Similarly, as the weather cools and we head into winter, demand also increases to keep homes and businesses warm. An increase in demand typically correlates with price spikes. On the other hand, one can assume that prices will drop during periods of moderate temperatures, which we typically see in the fall and spring.
It should also be noted that power is purchased at localized load zones in a forward-looking market. Each month has an “off peak price” applicable to nights and weekends and an “on peak price” applicable to weekday daytime hours when power is more expensive.
Impacts on natural gas market cycles
Natural gas prices also tend to follow seasonal trends, and like electricity, demand tends to decrease during the fall and spring, which are often more temperate. Typically, the amount of production in the U.S. meets or exceeds demand for energy during fall, spring, and summer. Natural gas can be stored, which means that distribution companies can store it for use during periods of peak demand (like the cold winter).
It’s important to note that the amount of natural gas in reserves can cause prices to jump or fall if the actual amount is different than expectations and historical benchmarks. For example, the polar vortex a few years back created a strain in the market, as extreme winter temperatures challenged supply due to extreme demand and led to soaring prices as a result.
Preparing ahead for energy pricing shifts
While you can’t predict exact shifts in the market, typical cycles can be a great benchmark to start from as you’re planning for energy purchases. As a knowledgeable supplier with 30 years of experience, we’re committed to keeping our customers educated on the market to help them make more informed decisions for their homes and businesses.