Tracking the natural gas market is the key to understanding electricity price trends. There are those that rely solely on a technical view, and others who lean on their own fundamental analysis. At Live Energy we look at both. In addition to the every day analysis, every once in a while there are certain events out on the horizon that present an absolute certainty that the market will react one way or another. As I write this post today, there are several critical factors that we believe must be taken into consideration, if you have a business electricity contract expiring in the next 12 months.
Recently the natural gas market has been skipping off the natural market floor, that is a function of natural gas / coal parity. When natural gas is as cheap as it currently is, it is near parity with coal. When this happens there are generation units that have the ability to switch from coal to natural gas. This establishes a natural floor around the $3.75 per MMBTU mark for natural gas. At this level, you often see generators switching to natural gas, which results in a tightening of supplies, and establishes support of natural gas prices around $3.50 to $3.75. So the bottom line is that natural gas prices really cannot go lower from where they currently are for any sustained period of time.
Factor #1 : The November Elections
In November we will finally see how the much-anticipated elections will play out. If the democrats hold control of both houses, it is very likely that the economic outlook will remain negative, and may very well deteriorate further. That being said, we are already at historic lows in the natural gas market, so that would likely mean that we would simply continue to trade sideways. If the republicans are able to take the house or the senate, the anticipation of gridlock will likely be viewed positively with respect to the economy, as it would signal an end to the democrat’s agenda being pushed through. Businesses in the US are hoarding cash, because of the uncertainty about what the rules of the game will be in 2011 and beyond. A bit of gridlock should be enough to push some of these companies to begin spending again and doing some hiring.
Factor #2 : Lame Duck Congress
After the elections, lawmakers will return for what many anticipate will be a lame duck session. During this session, it is very likely that all of the Bush tax cuts will get extended. If this happens, you will have another shot of optimism about the economy; quite possibly enough to really change the dreary outlook that has plagued the US for the past couple years. It is uncertainty about the business landscape that has caused the economic wheels to slow, and taxes are one of the biggest unknowns at this time. This unknown factor has many businesses playing defense, until this issue is decided one way or another.
Factor #3 : Colder Then Normal Winter Predicted
Major weather reporting centers are already calling for a colder than normal winter. This could begin to manifest as early as November, during the heat of the election aftermath, and the lame duck session. Obviously this would be a bullish signal that could send prices higher with just a few consecutive weeks of heavy withdrawals from natural gas storage.
So, what to do?
At this point, the possibility of prices getting any lower is slim to none. But there are three looming factors that will absolutely, without a doubt impact economic outlook, and by default impact the energy markets. It would not be the least bit surprising to see the market jump over 30% from current levels as early as November. Remember that one year ago prices were 30% higher than where we are today. The key takeaway here is that if you like what you are seeing with rates today, and you know that you are going to have to make a purchase in the next 6 months, we strongly recommend that you not wait until November. Get your deal done now and eliminate the looming risk from the picture.