Energy prices fell for the second week in a row. During this seven-day report period natural gas prices on the New York Mercantile Exchange (NYMEX) fell 4.2% and the average price for peak power on the PJM fell 3.0%.
The usual culprits, weather and storage, get most of the credit for this week's price reduction. These two variables work hand-in-hand to place downward, and in some cases upward, pressure on energy prices.
For example, this week we experienced mild temperatures. This mild weather kept a lid on the cooling demand, allowing more natural gas to be directed to the storage fields rather than to power plants. In fact, this week's natural gas storage injection was 111 Bcf, the largest injection in the last 20 months. Mild temperatures and large gas injections tend to place downward pressure on energy prices, while hot temperatures and low injections can place upward pressure on prices.
There are many other variables that can influence energy prices. Two such variables to keep an eye on in the coming months are hurricanes and the state of the economy. Hurricane season started June 1st. Hurricanes can disrupt the production process in the Gulf of Mexico, impacting supply. A robust economy can bolster the demand component. According to the U.S. Energy Information Administration (EIA), "the industrial sector is responsible for nearly a third of total energy used in the Unites States." In other words, performance in this economic sector can have significant impact on energy prices, so keep an eye on the market.
Natural gas and electricity are two of the most volatile commodities traded in the world. However, the good news for now is that both natural gas and electricity prices are trading near their second lowest level in nine years. This may be a favorable time to look at an early renewal strategy.