Like many commodities, the markets for electricity, natural gas, oil and renewable energy are complex and constantly changing. In fact, prices change hourly for most fuels.
Fundamental economic factors – like supply, demand and changes in fuel used for generation – are relatively predictable, but when you add political and regulatory factors to the mix, as well as financial speculation, forecasting energy prices becomes more challenging.
Here are the Top 10 Factors affecting the daily price of energy:
- Supply Energy from nuclear, coal, gas, oil and renewable sources reacts quickly in response to demand. Prices fluctuate hourly as a result
- Demand Demand for heating, cooling, light and processes varies with activity in the US economy, technology and efficiency measures.
- Gas Storage Represents energy “inventory” (since you can’t store electricity), i.e. the difference between supply and demand. Gas injections and withdrawals are announced weekly.
- Weather Forecasts This is a major factor affecting spot market prices and short-term futures contracts. Whether the forecasts become reality is less critical to longer-term prices.
- Generation Changes
- Nuclear Retirement of older plants as they require re-licensing
- Coal Coal plant conversions to natural gas to avoid scrubbing-technology costs.
- Transport Across the U.S. there are severe constraints in gas pipeline and electrical transmission capacity, which take time and investment to reverse.
- Global Factors Despite the massive growth in shale gas production, major changes in global oil supplies can affect U.S. domestic energy costs.
- Imports and Exports Global oil and gas prices determine relative profits suppliers can make selling fuels domestically or overseas. All energy prices are connected to some degree.
- Government Regulation Federal (FERC) and State (PUCs) regulations can change both supply and demand costs quickly and significantly.
- Financial Speculation Like most other traded commodities, energy prices can be affected significantly by financial speculation, which is the least transparent factor of all.
If a market doesn’t seem to be following the direction indicated by fundamental factors, it’s almost always financial speculation, which is largely invisible, that’s causing unexpected movements.
Unless you’re a professional commodities trader, trying to hit the exact bottom of a market is a fool’s game. Nevertheless, making an informed decision about the most likely direction of the energy markets over the next 2-3 years is both possible, with expert help, and necessary to keep your energy costs as low as possible.