If you watched last weekend’s Masters, you saw some pretty sweet swings out there. If you like Masters Champion Dustin Johnson, some might even say he had 100% swing.
In this week’s Two-Minute Tuesday, we talk about natural gas products and what “swing” means.
What is swing percentage?
Swing is a term used in natural gas products to determine how much you can deviate from your monthly usage. The most common products are 0% swing and 100% swing, but you could do something in between as well.
0% Swing vs. 100% Swing
For 0% swing or a fixed price per therm, your supplier will determine how much you use month in and month out based on historical data. You pay a fixed rate for that monthly quantity. Anything you use over that monthly nomination, you will pay the market rate for. Anything less than that, you will sell back to the market at the market rate.
For a 100% swing product, you pay the same fixed rate regardless of deviations in usage. Let’s look at an example.
Say you use 10,000 therms every November. One November, this goes up to 11,000 therms. You were fortunate enough to lock in a rate of $.25/therm.
On a 100% swing product, you would pay $.25 per therm for all 11,000 therms.
For a typical fixed rate, or 0% swing, you would pay $.25 per therm for the first 10,000. But then you would pay the market rate, let’s say it’s $.28 per therm, for the remaining 1,000 therms.
Which swing percentage is better?
So, which is better: 0% swing or 100% swing.
The answer: it really depends on what you’re looking for and what your long-term strategy might be.
100% swing gives you budget certainty. You pay the same fixed rate regardless of deviation in usage in the coming year. Say you’re expecting increased production, maybe you’re adding new equipment, or you’re very risk averse and you’re worried about the cold winter coming up. 100% swing will give you protection from that.
On the other hand, if you’re not planning any major changes in the coming years and your usage has been pretty stable, a 0% swing product might be the best fit for you. Although there’s a little bit more risk involved with the 0% swing product, you get the advantage of paying a lower rate because there’s no risk premium included in the rate like there is with a 100% swing product.
So, what might be happening in your facility in the near future plays a big role in choosing the right swing product for your gas needs.
When it comes to natural gas products, channel your inner Dustin Johnson and make sure you choose the right swing. If you need help choosing that swing, reach out to one of our advisors.
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