While it is true that natural gas and electricity prices been trading in a relatively tight band over the last three months, prices have increased two of the last three weeks and are now trading on the high side of the band.
For this seven-day report period, the average 12-month price for natural gas on the NYMEX rose 9.4% and the 12-month average price for peak power on the PJM rose 4.7%. As a result of this week's unusually large price increase, natural gas prices have risen 12.7% and electricity prices have risen 6% since Sept. 7, 2012.
Analysts are having a tough time connecting the recent price spikes to any changes in the market fundamentals. One possible explanation is that the market is focusing on the fact that winter demand is on the way. The eight to 14 day forecast is now calling for colder-than-normal temperatures in the northeast. Cold temperatures can place upward pressure on prices.
Another possible explanation may be tied to the shrinking gas bubble. The power generation sector burned natural gas instead of coal this summer and reduced the size of the gas bubble. Since May 3, 2012, the gas surplus has shrunk from 55% above the five-year average to 8.6% above the five-year average. However, this is a relatively weak reason for a price increase, given the fact that storages will be full prior to the start of the November 1 heating season.
For now, prices are still very attractive relative to the last nine years, but the market is looking for any reason it can find to jump up. Stay tuned. Mother nature is unpredictable and can have a huge impact on the direction of energy prices.