Over the last two months, the Bulls and Bears have wrestled for control of energy prices. Since May 3, 2012, the Bulls have been winning the pricing battle. Natural gas prices (for the forward 12 months as traded on NYMEX) have increased 8%. Electricity prices (for the forward 12 months as traded on the PJM) have also increased by 8%.
However, for this seven-day report period, natural gas and and electricity prices were unable to string together two consecutive increases. There were too many variables holding down prices. For this report period, the 12-month average price for natural gas on the NYMEX dropped 1.6%, while the 12-month average price for peak power on the PJM fell 1%.
One variable that may have placed some downward pressure on natural gas and electricity prices this week was crude oil. Crude oil prices dropped below $79/barrel for the first time in 18 months. Oil prices fell on fears of a worldwide economic slowdown. Many analysts fear the euro-zone instability may slow down the worldwide economic recovery. A weak economy means lower demand for energy, which usually means lower energy prices.
A second variable that kept prices in check was the natural gas storage position. Although the natural gas surplus shrunk for the eighth week in a row, the surplus is at a record-high level for this time of year. In fact, we now have 3,006 Bcf of gas in storage. This is the first time in history that the storage level has risen above 3,000 Bcf in the month in June. Normally, we do not hit the 3,000 Bcf level until the end of July.
Where do prices go from here? The huge question is whether or not the summer season will be hot enough to reduce the natural gas bubble. Summer officially started on Wednesday, June 20. We won't know the answer until mid-August when the electric power plants, which burn natural gas, are operating at full speed.