A Perfect Storm for Energy

April 2016

Most energy buyers are aware that natural gas, electricity, oil and other energy markets are at historically low price levels. The crunch questions are why, and how long is it likely to continue?

First, some perspective. How low are the markets compared with the last 5 years or so? The answer is that natural gas, currently at $1.91/Decatherm is almost exactly at the low point in April 2012, which was the lowest price for many years. See the 5-year natural gas price graph below showing the main price influencers.

Natural gas is used for about 40% of all electricity generation today in the mid-Atlantic States, so natural gas prices, which have fallen about 40% in 5 years tend to ‘drive’ electricity prices, which have also fallen substantially though not quite as much as gas (about 27%).

So what’s causing it? We have an almost Perfect Storm of factors driving energy prices down. Here are the main ones:

  1. Global oil prices have fallen from $100/barrel to about $35/barrel, or almost 70%.
    1. Strong Supply is due to increased US shale oil production, Iran’s refineries coming on stream and, most importantly Saudi Arabia keeping the spigots open
    2. Weak Demand is global, but especially from China, which registered a 25% drop in manufacturing output in January 2016!
    3. Low prices are self-fulfilling. If a country’s oil revenue falls, but it has social/financial commitments to its citizens, the only way to maintain those commitments is to pump more oil, which exacerbates the problem.
  2. Natural Gas prices are more regional than global. They’re down 40% in the U.S. but not in Europe or Japan.
    1. Strong supply is caused by more shale gas finds and huge increases in productivity due to improved fracking techniques - using fewer rigs but with much higher production.
    2. Weak demand – a 31 year low was recorded recently with natural gas storage at all-time highs.
    3. Mild Weather – Since the ultra cold Polar Vortex winter in 2014 (which emptied the gas storage – i.e. the nation’s energy inventory), we’ve experienced 2 relatively warm winters followed by 2 cool summers.
  3. Do global oil prices control U.S. natural gas prices? The Energy Information Administration says that “the historically strong correlation between oil and natural gas prices has recently ceased in North America as natural gas prices have been kept down by the rapid development of shale gas”.
  4. What will happen in future?
    1. Storage is 63% higher than last year and 52% than the 5-year average.
    2. With another cool Summer, gas storage could fill up completely – and gas producers may have to stop producing for a while – which would also mean they couldn’t service their bank debt.
    3. Exports to Europe and Mexico probably won’t come on stream quickly enough.
    4. If oil (or natural gas) companies go out of business, who will be left to produce more when the pendulum swings the other way. Will we be able to refurbish mothballed refineries fast enough?

The Bottom Line is that excluding the extremes of massive over-or -under production of energy around the world, we can expect sustained low prices for the next year or two.

BUT, this rosy picture can be upset by a number of factors such as

  1. China’s economy recovers
  2. The weather in the U.S. turns hot this summer or cold in the coming winter.
  3. The Saudis change their policy of unrestricted production in order to put higher cost producers – Nigeria, Venezuela, Russia, some US oil – out of business.

 

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Judi Hall-Subers, Senior Account Executive, South Jersey Energy Solutions

“Of all the brokers and consultants I work with, Applied Energy Partners is one of the best. Their people and their process are best-in-class, and they give me everything I need to do my job effectively. In short, they are a joy to work with.”

Judi Hall-Subers, Senior Account Executive, South Jersey Energy Solutions

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