Analysts are having a difficult time predicting the direction of energy prices. For this seven day period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) fell 3% closing at $0.455/therm, while the 12-month average price for peak power on the PJM fell less than 1%. However, consider for a moment that since March 4, 2014 natural gas prices have dropped 2.2%. Meanwhile, over on the electricity side prices have risen 6%.
Why are natural gas prices sliding downward as electricity prices are creeping up? Natural gas and electricity prices almost always travel in the same direction. What does this say about where energy prices will go from here? The Bulls are focused on the natural gas storage deficit and are calling for prices to move upward. In the other corner, the Bears are betting on lower prices, pointing to current natural gas production numbers and the moderate weather.
We are dealing with a huge storage deficit. The natural gas storage fields are operating at an 11-year low and currently sit 48% below the five-year average. The Bulls believe that if we have a hot summer, and natural gas is directed to the power plants instead of the storage fields, that we could see more upward pressure on energy prices.
On the other hand, the Bears point out the fact that natural gas production in 2013 hit an all-time record high. The shale gas phenomenon is responsible for these record high production numbers we enjoyed in 2013. The Bears believe that the industry can refill the storage fields by November 1st if we have a normal summer. If they are correct, and the storage deficit is significantly reduced by the end of summer, we may see some downward pressure on energy prices.
The future direction of energy prices is influenced by many variables. But for now, the biggest variable to watch is the Summer weather.