Natural Gas Chart NG OCT10 | Business Electricity Prices Hold

Business electricity prices continue to hold at support with Natural Gas (NGOCT 10) closing yesterday, down 4.6 cents to $3.76 / mmbtu on the Nymex Henry Hub.  Between August 26 and Sept 10, we have traded in a range between $3.95 and $3.69.

Yesterday saw storage come about where we expected it to at net injection of 58 BCF.  This continuation of 12 weeks of supply contraction was not enough to spark a move to the upside.  The downward trend remains in place, as you can see in the chart.  The 50 day is still trading below the 200 day moving average, and there is really no indication that the market is going to break one way or another as we close out the week.

We are seeing lots of commercial and industrial clients shore up electricity renewals out beyond 2012 while prices remain depressed.  With the natural gas to coal parity considerations, this feels like smart move at this time.  A break out over $4 may signal a missed opportunity.  Locking in electricity rates with NG at any where close to $3.75 looks like a very safe bet, particularly if you have an immediate start.

The same week last year we saw a withdrawal of 194 bcf, while the five year average for the week is 178 bcf.  As of this writing March natural gas was down about 6.5 cents to $5.35 / mmbtu, after hitting a morning low $5.23.  The market remains soft and the next few weeks will be increasingly important as we try to gauge where our inventories will be at the end of this heating season.  For now the market remains bearish.

So are we looking at another year of $4-6 gas? At this point it is hard to tell, but we are seeing many commercial electricity users taking this opportunity to extend contracts as far as their credit will allow.  It’s hard not to consider locking in now if you simply think back to the summer of 2008 when we saw electricity rates spike to over 20 cents for some buyers.  The credit market seems to be thawing a bit, and several Retail Electricity Providers are offering 60 month terms again.

It is too early to start making predictions about the balance of 2010. The uncertainty in the economy is compounded by conflicting views about what production will look like in 2010.  Although rig counts were slashed in 2009, it has not been enough to significantly impact the production according to recent production reports.  It’s getting tougher to accurately predict production rates as techonology continues to change the game and more unconventional plays are factored into the domestic market.  Not to mention the emerging LNG market which brings a new international component to the picture.

Electricity Rates Drop on Lower Than Expected Withdrawal of 115 BCF

The larger than expected draw down was enough to catapult natural gas prices 8% higher within minutes, and the gains held through the close. The market peaked at $5.347/MMBTU and closed the session at $5.298/MMBTU. This was the highest settlement seen since January.

The question now is, where do we go from here? Is this another head fake from an oversupplied natural gas market that has made several attempts at a reversal only to retreat as fast as it advanced? Or are we seeing the first move back to supply/demand equilibrium. The stout withdrawal was eagerly anticipated by all market participants, and it was just a matter of time before we had a spike to the upside. The anticipation had been building for weeks. But all of the rallies so far have faded quickly.

In my opinion the market will continue to be extremely sensitive to short-term fundamentals. Weather, storage, and production as reported week to week will cause range bound market gyrations for at least the next couple months. We have a long way to go before we will know whether we will return in 2010 to the $6-8/MMBTU market that many of the natural gas producers are predicting, or if we are looking at another year of oversupply, and low prices in the $3-5/MMBTU range.

Remember, the last production report showed a decrease in production of 1.4 Bcf per day from August to September. We would need to see a continuation of this trend in the next production report due out at the end of December to believe that we have a solid floor in natural gas prices. One scenario that could lead to a rebound in 2010 is if we see consecutive, significant drops in output due to the massive reduction in rig counts in 2009. That may signal a much lighter injection season in 2010, and a chance to work off excess inventory that has suppressed prices in 2009.

For electricity and natural gas buyers the next 8 weeks will be an important time to watch closely and plan for the next 24 – 36 months.

Natural Gas In Underground Storage Compared With 5 Year Range

To put this in perspective, during the same week last year the Energy Information Agency reported a withdrawal of 64 bcf.  The five year average for this week has been a 43 bcf withdrawal.  Typically we start to see a draw down of supply in November.

This now leaves our natural gas supply brimming at 3,837 bcf, which is 14.5% above the five year average, and 14% above last year’s level. Of course, these numbers are a reflection of the week of Thanksgiving where we often see a slight dip in natural gas usage in the industrial sector due to the holiday.

Looking to next week it will be interesting to see if the latest blast of winter weather will finally be enough usher in the withdrawal season. My guess is that we will in fact see a modest withdrawal next week. Failure for this to materialize could signal even weaker demand than is currently assumed.

For commercial buyers of electricity and natural gas the latest report means you have another week to contemplate whether we have seen the market bottom.  One thing for sure is that every economic data point that is released in the coming weeks will be closely watched as traders, analysts, speculators and consumers try to determine where we go from here.  Prudent business electricity and natural gas users will want to be prepared to make necessary strategy adjustments based the data released in the next month.

Natural Gas Storage Report 12/03/2009

This is a bit of good news for producers who have seen the price they get for natural gas crater over the past year to a seven year low. For consumers of natural gas and electricity this may be a sign that the market is coming back in to balance, and showing support around the $5 per MMBTU mark. Many commercial and industrial users will surely take a hard look at locking in electricity contracts now that we have seen hard evidence of a supply realignment.

Yesterday we saw the official end of hurricane season that came and went without a single interruption in the Gulf of Mexico. This, along with the industrial demand destruction due to the recession, and the mild winter to date has led some to predict another year of three to five dollar gas and low electricity rates.

So what will it take for prices to rebound? First, we absolutely have to see a colder than normal winter to draw down storage which currently sits 12% above the 5 year average. Second, we need to see improvements in the economy. Finally, we need to see a continuation of the drop in natural gas production. The next natural gas production report due out December 29th will be very telling, and will set the tone for 2010.

It’s amazing how quickly market sentiment changes although the fundamentals remain unchanged.  We are still brimming with a glut of natural gas, and the chances of a significant rebound in prices would require that we not only have a severe winter, but that we see a reversal of the demand destruction brought on by the recession.  As winter sets in it appears more and more likely that we may actually go through the winter of 2009 with a $4 handle at the Nymex Henry Hub.  This would have been unthinkable just a year ago.

For those businesses that have the credit and ability to lock in electricity or natural gas prices now (for the calendar year 2010 and beyond), this may very well be the perfect time to take advantage of an extremely soft market.  Only time will tell if we have hit the bottom, or if there is still further to go.

Texas Electricity Prices Uncertain - Nymex Henry Hub Historical

1.  Failure to Properly Profile Your Business – Profiling your business consists of reviewing your historical usage pattern, as well as considering how your usage pattern may fluctuate in the future.  You must ask yourself, what if we add or delete a shift?  Is there any chance we may downsize or grow?  Is there a possibility of adding more equipment, or shutting down any equipment that uses electricity?  The bottom-line is that you must have a good sense of what your consumption pattern will look like in the future so that you can enter a contract that does not contain penalties for a fluctuation outside the “swing” which is allowed in the contract that you enter.

2.  Failure to Define Your Price Targets in Advance – Buying on emotion, and in a reactive manner often results in poor decision-making.  However, if you develop a strategy in advance, you can remove emotion from equation, and simply execute a plan that has been established in a proactive manner.  Your plan should give you price targets on the high and low side, and include certain time frames to guide the process.  If you know for a fact that you would be ready to lock in as soon as you get to a savings of 15%, then this makes the process very easy.  Conversely, in a rising market, you may determine that if your costs rose any more than 10%, then you could not be competitive.  Therefore you would want to set a hard stop at 10%, and if the market rises to that point, there is no discussion.  You simply execute the plan that says MUST limit any cost increase to 10% or less.

3. MOST IMPORTANTLY! Failure to Automatically Track Renewal Rates –  The absolute biggest mistake that businesses make  is they fail to track their renewal rate.   The reason so few people do this is because it is very time consuming to look up natural gas prices everyday, and make the calculations to determine what that means to you in terms of an electricity renewal rate.  Live Energy has a tool called the Live Energy Portal, which allows businesses to do this automatically.

These are only a few of the common mistakes that businesses make in purchasing commercial electricity.  The good news is that there are simple ways to ensure that you do not make these common mistakes.  For more information about how Live Energy can help you bullet proof your process and avoid making these common mistakes, call us today to speak with a certified Energy Advisor.