Electricity/Energy (Third Quarter 2010)
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Customer Experiences
Energy commodity prices continue their volatile trends of the past few years. We are presently enjoying a six to seven year market low. Crude oil has been trading in the $70 to $85 range, most recently in the low $70s. Natural gas prompt prices traded in the $4 to $5 range all spring, on the higher end June 1.
Some numbers:
Crude oil: Near $75. Peak was near $140/barrel back in July 2008.
Natural Gas: 12 month strip trading near $6.25 per MMBtu. July 2010 is now prompt month.
Coal: Still down, near $50 per ton, compared to $140 per ton in July 2008.
Electricity: Market rates are still near 6-7 year lows. Rocky low. Can move a half penny on bad news.
We are still riding a rocky bottom, which offers nice opportunity for conservative customers to lock in long term fixed price supply for budget surety and price protection. Watch for the valleys to try and catch the lowest lows. Customers with a higher risk tolerance can ride hourly market rates and enjoy the lowest energy costs in years… that is… until the economy recovers. Some customers have chosen this tactic. What’s the hourly risk? Once the market moves back up it will be too late to lock in low futures fixed pricing leaving hourly customers with a hard choice, lock in at a high fixed rate or continue paying unknown high market rates.
How long will the present buying window last? Domestic natural gas storage reserves remain above the five year average and last year levels. Natural gas prices remain low and electricity prices generally track natural gas prices. 2011 forward prices are low, 2012 is only about 1/10 penny higher, and 2013 strip pricing is decent but about 3-4 tenths higher. Forward prices may start to rise soon. NOAA, CSU and Accu Weather are all predicting increased hurricanes this summer based on a change from El Nino to La Nina. Summer heat, hurricane fears, Mideast fighting, etc. can push prices up.
So far, the BP oil spill appears to not have significantly affected energy prices. However, the moratorium on drilling will likely hurt production in 12-24 months, perhaps the same time as recovery increases demand. There has been more talk of economic recovery, this also causes upward pressure. Actual recovery will increase energy demand and we expect tight supply-demand conditions to return. A supply/demand squeeze could cause dramatic increases, perhaps in 2012-2013.
How long a supply term should be locked in? The futures curves are presently contango, that is to say that prices get more expensive the farther into the future you look. Suppliers are generally not pricing beyond three years. With prices at six year lows, locking in for 24 or 36 months is a good move.
Give us a call. UtiliTech continuously monitors the market to help our clients execute timely, right product, right term and lowest cost energy purchases.