Of Forests and Trees
Most of us already understand that wholesale natural gas prices drive not only retail natural gas contracts, but also the price of wholesale and retail electricity. We also know that there has been a considerable easing of near term prices lately compared to fall 2005 highs, driven primarily by moderate weather, lack of major storms and a somewhat stable international environment. At the same time, crude oil has soared to record new highs, and experts warn that, though crude oil and natural gas have been generally de-coupled in terms of day-to-day correlation, our nation and the world are consuming more BTU-producing fossil fuels than we can produce at a reasonable price for any length of time. So let that be a warning to those that tend to micro-manage their energy portfolio. It's time to shift focus from the trees to the larger forest in which we operate. The price for a 12-month strip of natural gas was just under $4.00/MMBTU only five years ago. We now are looking at a strip price of about $8.00/MMBTU. However, this is not bad at all, considering that prices were in the $12/MMBTU range in the aftermath of Katrina and Rita in the fall of 2005. To put things into perspective for those that think there is a lot more room for price decline, consider these issues:
- The price of natural gas has risen an average annual rate of 14 to 15% over the past decade
- Natural gas for electricity generation is the fastest growing part of the demand for that form of energy
- Current futures prices are lower than they have been, relative to the 10-year trend, more than 98% of the time
- The cost to produce marginal gas is rising (as the largest fields are being depleted and the imperative is to drill more holes – at increased expense – to get less gas)
- New sources of gas (LNG, new pipelines and fields) are 8 to 12 years away from being significant (and won’t be cheap, in any case)
- New base load generation is 8 to 15 years away
So, the point that this would lead to is this: now is a reasonable time to fix prices for a portion of your energy portfolio and to consider the longest terms available as a way to avoid volatility and historical increases. Speaking of history, what was that old saying? “Those that ignore it are doomed to…?”
Quick Buyer's Tip
We’ve decided to challenge some widely-accepted energy “truths” that affect your energy-buying decisions in next month’s MarketElert – here’s a sample of some the issues we will examine:
- The idea that there is always a significant premium when seeking a fixed price, compared with an indexed price (not so in a recent study)
- Complex products yield the best results over time (the trap of block and index)
- Buying at wholesale is always the best route if you can do it (almost never)
- Portfolio management offers the least cost (not what it’s designed to do)
- Today’s downturn in wholesale prices is here to stay (not if history is any indication)
Tell Us What You Think
Let us know what you'd like to see in MarketElert, or give us your comments or questions. Just email us at
melert@energywindow.com.
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