Have we hit the bottom for natural gas prices?

The Jun12 contract increased $0.086, closing at $2.371.

Gas futures have not had a three-day rally since the second half of January!

The market continued to push upwards based on Monday’s news of a drop in output in February and a revised chillier forecast for the Northeast over the next two weeks. Anadarko Petroleum Corporation announced on Tuesday they expect more natural gas production curtailment while Chesapeake Energy, the second largest producer of natural gas, announced a first quarter loss of $28 million, compared with a year earlier loss of $162 million.

Natural Gas market rises, leaving ten year low.

The prompt month NYMEX contract hit a 10+ year low on April 19 at $1.907/mmbtu. Since then, the prompt month is up $.44 (over 20%), currently trading at $2.34. The enclosed chart illustrates the recent move.

There has been evidence of very high levels of coal to gas switching in the generation stack, helping increase demand. This occurs when gas prices fall to a level where it is economical to shut down a coal-fired generating plant, and turn on a (less efficient) natural gas-fired plant. This has been a widespread issue lately, and ramped up even higher when gas prices dipped below $2.00.

Then yesterday, the EIA reported that production levels in February actually fell from January’s output. The market took the news seriously and rallied $.10 yesterday and a further $.05 today. http://www.eia.gov/oil_gas/natural_gas/data_publications/eia914/eia914.html

Production cuts, announced by many producers in January, and a falling rig count are the contributors here.

Storage is still at a very healthy level, but there is a growing sense that higher demand and slowing production is helping to bring the market back into balance, after being oversupplied.

Natural Gas report – a new ten year low

The May 2012 natural gas contract finished unchanged, closing the day at $1.951, another new 10-year low.

The market is looking for direction from today’s inventory report. Current projections are injections that range from 12 Bcf to 41 Bcf, with consensus near 23 Bcf; the estimate at this time last year and the five-year are 42 Bcf and 26 Bcf respectively.

The EPA on Wednesday  released new regulations that are designed to limit the release of smog-forming chemicals and other toxic substances that may escape into the air during drilling for oil and natural gas; these rules will start in 2015 and will be mean forecasted higher prices for calendar strips trading long term.  This will result in higher long term contract prices.

Additional factors pointing to higher long term prices is the growing conversion from coal to natural gas electricity generation plants.

Nymex Natural Gas Price Trend
NYMEX Natural Gas Price Trend

Understanding the NYMEX Natural Gas Futures Market

This posting is a bit more technical than most postings on this blog.  But it may give you a better perspective on what has happened to energy prices over the past few years.

Fixed price natural gas contracts, as well as electricity contracts in states where natural gas is the primary energy source, are based on the natural gas futures market.  These futures are traded on the NYMEX exchange.

The graph below displays what the 12-month price was for each of the even years of the last decade.  This was done simply to avoid having the graph be too crowded.

The different colors are to separate the different years.  The brown line is 2012 while the red line is 2010.  You can see that in 2008, prices for April – August went through the roof.

Meanwhile, you can see that the 2012 prices are below what they were in 2002.  This can be attributed to three factors:

  • Economic downturn that has reduced natural gas consumption
  • More efficient drilling for gas due to fracking technology
  • An unseasonably warm winter for 2011-2012 that resulted in a dramatic reduction in consumption for heating.

When you look at where prices have been over the past ten years, think to yourself:

  • Do you think there is a greater risk for prices to rise versus for prices to drop further?

When you contract your electricity and natural gas with a fixed price contract, you should look at this decision as you would an insurance policy.  You are insuring against any increase in prices.  If you spend $5000/year on fire insurance, would you feel like you wasted your money if you did not have a fire during the year? Absolutely not!  You insured yourself against risk.  This is the same story with fixed price energy contracts.

If you believe that prices will go down further, by all means, purchase an index contract and you will save more money….as long as you understand that the price may rise.  We can accommodate you with any kind of energy contract.

So what is the biggest risk?  Doing nothing at all!  If you just pay what your utility charges you, you have no control whatsoever over your energy costs.  Contact Better Cost Control to learn more.

Why you should have Better Cost Control manage your energy procurement

It is our desire to be the #1 electricity and natural gas consulting company in the Northeast. If not in terms of volume, then in terms of professionalism, integrity and best business practices. We are well on our way!

Many of our clients have attempted to negotiate electricity contracts themselves with the list of electric power companies they find online. After spending weeks trying to compare confusing offers and listening to the biased sales pitch of individual electric or gas companies, they have decided to outsource utility negotiations to us. These are our best references.

The greatest challenge in this business is choosing the right Supplier. There are over 60 electricity suppliers and over thirty gas suppliers, choosing the right one for your business is a daunting and time consuming task.

The owner and president of our company has 9 years of energy procurement experience. His main job is to evaluate the Suppliers and determine who the top 10 Suppliers in the industry are. We have them competitively bid on your business.

We have made a significant investment in developing and training a highly skilled staff specializing in electricity and gas deregulation.

As of July, 2011 we have 350,000,000 kWh under our management. We service all sizes of business clients, and take great pride in giving the same level of service to all sizes of clients, from the Fortune 500 client to the “mom and pop” restaurants.

We are in the business of energy procurement for the long-term. Our core values are Integrity and Professionalism. These are things that we have seen a shortage of in our field.

80% of our clients sign an Exclusivity Agreement that states that we are to completely handle all negotiations and correspondence for and behalf of our client. This is a testimony to our professionalism and energy procurement expertise. It is also the best way for a client to be assured of getting the best service.

Our pricing desk utilizes a variety of web based automation tools. This enables a quick Request for Quotation process, timely negotiations, preparation of Bid Comparison and Savings analysis.

Our desire is to completely manage your Energy Procurement, with as little effort from our Client is possible. At the same time, our energy consultants bring significant business to our Suppliers with the least amount of effort on their part. We make a concerted effort to be “easy” to do business with.  This helps you, the customer, to get the best possible prices on your energy.

What is the NYMEX Strip?

The NYMEX Strip, or “12-month strip” is the average of the daily settlement prices of the next 12 months’ futures contracts, and is a good indicator of where natural gas prices are for the next year.

So what is the NYMEX?

The New York Mercantile Exchange (NYMEX) is the commodity exchange based in New York City where natural gas, electricity, and other futures and options are traded. Natural gas is traded in two ways: through traditional pit trading and on Globex. The traditional manner – open outcry in the NYMEX pit – takes place Monday through Friday from 9:00 a.m. until 2:30 p.m. (EST) with the exception of holidays. Globex is an electronic platform traded Sunday through Friday from 6:00 p.m. until 5:15 p.m. (EST). Globex is becoming the dominant way to trade gas.  Electricity is traded in the same traditional manner, in the NYMEX pit through a specific futures broker.A natural gas futures contract is a standardized contract for the purchase or sale of natural gas for future delivery under the provisions of exchange regulations. The standard contract for natural gas at Henry Hub – a pipeline interchange near Erath, LA, and the standard delivery point for all NYMEX natural gas futures contracts – is 10,000 MMBtu, 10,000 Dth, or roughly 10,000 MCF.

Like the natural gas it represents, NYMEX natural gas futures contracts can be extremely volatile. A number of supply and demand factors can influence the trading of natural gas including the weekly US Storage activity report published on Thursdays at 10:30 a.m. by the E.I.A.. Other conditions that can affect natural gas prices are rig counts, pipeline infrastructure, geopolitical influences, alternative fuel pricing, weather and the economy.

The natural gas NYMEX Strips market has an affect on the prices of electricity contracts, though not a perfect correlation.  In regions with a higher percentage of natural gas as the generation fuel source, such as the Northeast, this correlation is greater than, for instance, the Midwest, where coal is the primary fuel source.  None-the-less, in the Northeast, movements in the Nymex Strips market provide a reasonable data point for decision makers procuring electricity.