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Energy Price Outlook
So I believe we may be experiencing Spring in reverse!
March was gorgeous while May and early June have been cool and wet. The energy market seems to mirroring this pattern, with electricity and natural gas prices falling another 4% eventually hitting bottom on April 17th. Since then natural gas prices have risen roughly 6% (as of June 6th) so prices are approximately 2% higher since the Spring 2012 issue was released. Lets examine the fundamentals to get some insight into whether the rising market can be sustained?
The Economy
Just as you were getting ready let out a deep breath because you thought the worst of this dismal economic climate had passed...what happens.. the U.S. unemployment rate goes up and Spain jumps to the front of the European bailout line. Next thing you know the Dow plummets! Agggh!
Well the ride was expected to bumpy but good news on the employment front is what is required to sop up the housing inventory in the U.S. The uncertainly caused by Europe continues to inject uncertainty into the U.S. economy causing employers to hire cautiously and banks to hold onto loanable funds.
Weather
June marks the official start of the hurricane season but the tropical storm season got off to a jump start with two named storms in May. The good news for energy consumers is that hurricanes do not carry the same weight in the market as they have in the past. When Hurricanes Katrina and Rita hit in 2005, the prices of natural gas and power nearly doubled. At that time the Gulf of Mexico accounted for 17% of all U.S. natural gas production. Today the Gulf of Mexico only accounts for 7%. If a major hurricane shuts in Gulf of Mexico production facilities, the reaction in the natural gas and power markets is likely to be much more muted.
Outlook and Buying Strategies:
The natural gas market and the power market are still dominated by a large surplus of natural gas in storage. The excess, though, has been getting smaller (see the article Production and Storage in the column to the right).
With the natural gas and power markets beginning to tighten the expectation of Howell Energy Consulting is for prices to rise slightly but still remain competitive. The market has picked up some volatility so there are intra week opportunities that can reduce power prices approximately $.004/KWh. Take a look at the strategies below to see which best fits your current needs and risk tolerance.
Possible strategies include:
- Weak current conditions mean that near term energy prices are affected more than longer term prices. Buyers in the market today can lock in very competitive pricing.
- Buyers with contract terms that end later in 2012 may want to test the market now to set a baseline price. Have a price in mind and if the market can get to your price you should execute a power or natural gas contract.
- For customers comparing themselves to monthly utility prices, an index product that tracks the market may work for now. An index price allows you to take advantage of a weak short term market and fix a price as the forward market begins to strengthen.
- If you are comparing a monthly price to a term price note that as the monthly price increases so does the term price. The $.056 utility one month price looks pretty good when compared to the $.07 twelve month price marketers price but when the single month utility price does increase to $.07/KWh the twelve month marketer price may be over $.08! We are looking at the bottom of a market that is currently has a large oversupply...take advantage of it!
To understand how these strategies apply to your business call Howell Energy Consulting to to create a procurement plan for your organization.
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