Energy and Utilities Outlook 2016: Leveraging the Price Volatility
In 2016, natural gas, coal and crude oil will continue to be the primary energy sources in the U.S. with support from nuclear and renewable sources. Oil will remain the primary fuel for transportation and industrial sectors.
A Steady Decline
Oil prices declined throughout 2015 driven by continued excess supply from OPEC, combined with lower than expected decline in the U.S. shale oil output and a slowdown in the global economy. With an almost stagnant domestic demand, the U.S. plans to export oil enabled by lifting the 40-year oil embargo. Lifting of economic sanctions on Iran have further added to the oil surplus. With excess inventory and slower growth expected in emerging and developed markets, oil prices will continue to decline in 2016.
In 2015, natural gas supplanted coal as the leading fuel source for U.S. power plants for the first time ever. Gas prices reached 16-year lows, providing a cost advantage for utilities and other energy buyers. With current gas inventory levels well above the five-year average and uncertainty over climate change forecasts, downward pressure on natural gas prices will continue in 2016.
Short-Term Contracts — The Way to Go
Low oil and derived commodity prices will help oil importing countries while increasing the revenue pressure on oil exporters. Globally, businesses will need flexible supply chains to leverage upon the price volatility in the current market. Category managers should opt for short-term contracts to procure energy commodities like oil, natural gas, coal and electricity. Energy-intensive businesses, such as transportation, cement, chemical and manufacturing industry can leverage low energy commodity prices by reprising their existing energy/fuel contracts commensurate with current market prices.
Technology for Efficiency
Implementation of technology-based platforms, such as the “Internet of Things” (IoT), will drive savings for category managers. Increased adoption of technology will result in further streamlined procurement processes and grid modernization, thus delivering improved efficiencies and savings.
Supply Market Intelligence — A Competitive Advantage
The above trends in the energy commodities market highlight the need for a robust procurement strategy, adaptable and flexible to current market conditions. Attaining cost savings amid lower commodity prices and the changing interest environment will be the key strategy for U.S. energy and utility companies. In addition, integrating supply market intelligence services with the procurement and supply chain divisions of E&U companies will help gain a competitive edge over companies with conventional procurement frameworks.
To read more on key categories and commodities, download your complimentary copy of the GEP Procurement Outlook Report 2016.