This week should have been a lesson in the international face of the current energy market…but it wasn’t.
We had an unprecedented aggressive incursion by Russia into Georgia, a country that is home to several important energy pipelines. Uncertainty usually means…what? Higher prices? That’s certainly what would have been expected.
Yet oil prices went down, and gas prices went down.
Read the wires, and you’re seeing a lot of analysts saying that current prices will hold steady or continue to drop for the foreseeable future. No one, however, is exactly sure why, or what this says about July’s price spike.
We had some questions about market fundamentals last week…despite the fact that, at the moment, market fundamentals aren’t doing a very good job of predicting movement on the NYMEX…so we’ll spend some time this week explaining what all this talk about hurricanes and storage and New England weather has to do with the price you pay for natural gas.
Everything you need to know about natural gas price comes down to one thing: America meets almost all of its needs through domestic production. While there have been, throughout history, some fairly wild swings in supply and demand, right now the two line up pretty well for the long term. Note that we said “long term”.
Because of this, natural gas prices are particularly sensitive to short-term supply and demand shifts. Thus the focus on hurricanes and New England weather.
Natural gas production is generally assumed to be working at peak levels, and the exploration, drilling and infrastructure that are necessary to increase production cannot be brought online quickly or cheaply. This is a pretty low-margin business, so people aren’t going to plunk down wells unless they know there’s a market for what comes out.
This means there is almost no “elbow room” for production to change in response to short-term events. With the production side inflexible, it’s all about short-term events that increase demand (hot summer/cold winters), limit capacity (rig count) or hinder drilling and delivery (hurricanes).
It’s also about the amount of gas being stored in the Strategic Reserve, America’s reserve fuel tank and the market’s release valve. When storage levels are high, gas can easily be released to meet short-term demand spikes. When storage levels are low, there’s less “wiggle room” all around.
These are the signs (some of them, anywya) that speculators read when deciding the price they are willing to pay right now for gas futures they may hold for six months…or three days.
Note that we said “read the signs.” Perception, hope, fear, risk tolerance, all the irrational human factors, also plays a significant role. Investors may overreact to indicators; they may unwisely downplay or ignore them. How they react often defies expectation or explanation.
All these factors have an impact on your energy bill.
Cost Containment knows how to read the signs for you. The right plan, the right price, is all you need to read.
Check the NYMEX