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Natural Gas Prices – Get Real

Previous articles on the topic of natural gas prices have looked at natural gas prices spanning the 179 month period of time running from January 1997 through November 2011 (click here, here, and here for more information). Here is a graph of the dataset.

Each time we have used this graph, we have noted that these natural gas prices are in “nominal” dollars, or dollars unadjusted for inflation. Readers have asked how natural gas prices have behaved on an inflation adjusted, or “real,” basis.

The blue line in the graph above shows natural gas prices in nominal dollars while the red line shows natural gas prices adjusted for inflation. Prices were adjusted using U.S. Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) inflators. In other words, prices are presented on an apples-to-apples basis in constant year 2010 dollars.

In “real” dollars, natural gas prices, over the 14 year and 11 month period of time, averaged $5.56/mmBtu, reached nearly $15/mmBtu ($14.97/mmBtu) during October 2005, and dropped as low as $2.29/mmBtu during December 1998. During November 2011 (the latest month for which we have data) the monthly average spot natural gas price at the Henry Hub was $3.22/mmBtu.

The above graph shows natural gas prices over the study period ranked by price, from lowest to highest. The November 2011 price of $3.22/mmBtu is at the top of the bottom quintile, meaning that over the identified period, 80% of the time natural gas prices, in real dollars, have been higher than they are currently.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us

Copyright 2011 by Avalon Energy® Services LLC

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Time to Convert

Like crude oil prices, fuel oil prices have risen dramatically (click here for more information).

The above graph shows the monthly average spot price history of #2 fuel oil delivered to New York Harbor. The prices shown date back to June 1986 and run through November 2011.

Fuel oil is a distillate of crude oil that is heavier than gasoline and similar to diesel. There are various grades of fuel oil (#1 through #6) but the most common is #2, which is used primarily for home heating and, occasionally, for electricity generation. As a home heating fuel, #2 fuel oil competes with natural gas, primarily in the Northeast US.

While crude oil and fuel oil prices have risen dramatically, natural gas prices have dropped precipitously (click here for more information). This has led to a large disparity in the cost of heating homes using fuel oil versus heating with natural gas.

The above graph shows the historical price relationship, on an energy equivalent basis, between fuel oil and natural gas, both delivered to New York City. Since 2006, the premium for fuel oil has increased at an increasing rate. For the month of November 2011, a million BTUs of fuel oil cost five and a half times the cost of a million BTUs of natural gas. This is a stunning difference in price for the same amount of energy. Home owners who heat with fuel oil and have the option to switch to natural gas should consider converting.

Many home owners who use fuel oil and would like to switch but do not have access to natural gas ask if they should convert to propane. Unfortunately, there is not much advantage in doing so. While propane is often produced in association with natural gas, propane prices track crude oil and fuel oil prices. This correlation with crude oil and fuel oil is true also with other natural gas liquids such as butane and ethane.

The above graph shows the historical price relationship, on an energy equivalent basis, of both fuel oil and propane compared to natural gas. Like fuel oil, since 2006, the premium for propane has increased dramatically. For the month of November 2011, a million BTUs of propane cost almost five times the cost of a million BTUs of natural gas.

Note: These prices are in nominal dollars and have not been adjusted for inflation.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us

Copyright 2011 by Avalon Energy® Services LLC

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Crude Oil and Natural Gas Get a Divorce

As discussed previously on this blog, natural gas and electricity prices in the wholesale markets have declined precipitously (click here for more information). What is more obvious, certainly at the gasoline pump, is that crude oil prices, unlike natural gas prices, have been on an upward trend.

The above graphs show (i) the monthly average spot price history of natural gas at the Henry Hub in Southern Louisiana and (ii) crude oil prices, or more specifically, prices of West Texas Intermediate (WTI) at Cushing, Oklahoma. Prices are shown dating back to January 1986 and through October 2011. Natural gas prices and crude oil prices both hit a peak during the summer of 2008 and then dropped dramatically as the economy went into recession. Natural gas prices have remained low. Crude oil prices recovered.

Natural gas prices and crude oil prices have become decoupled. Historically, on an energy equivalent basis, crude oil used to trade at about a 50% premium to natural gas, reflecting crude oil’s greater energy density, portability, and flexibility. More recently, that premium has increased to more than 300% or more (see graph above). Thought of another way, natural gas is trading at a more than a 75% discount to crude oil.

As of this writing, natural gas is trading at $3.32 per thousand cubic feet (MCF) and crude oil at $99.41 per barrel; crude oil is trading at a 400% premium to natural gas on an energy equivalent basis.

Why the divergence? Crude oil prices are driven by influences in the world energy market, the largest being growing demand in developing countries. US natural gas prices are driven by factors specific to the integrated North American natural gas markets.

Note: These prices are in nominal dollars and have not been adjusted for inflation.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096 or email us at jmcdonnell@avalonenergy.us

Copyright 2011 by Avalon Energy® Services LLC

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“Energy Prices Always Go Up”

There is a common perception that energy prices have been, and continue to be, on a one way path upwards. Is this the case? No.

The graph above provides a historical view of natural gas prices. Plotted are the monthly average spot prices of natural gas at Henry Hub (a trading hub in Southern Louisiana) going back to 1997. During November 1997, natural gas prices averaged $3.08/mmBtu. One hundred and sixty-eight months later, during November 2011, prices averaged $3.28/mmBtu.

Between November 1997 and November 2011, the monthly average natural gas price has traded in the following range (values given are in $/mmBtu):

Maximum 13.42
Average 4.92
Minimum 1.72

While natural gas prices are volatile, they do not “always go up.” In fact, they have declined. The prices presented above are in nominal dollars. If they are adjusted for inflation, today’s prices are significantly lower in terms of real dollars.

The natural gas “winter strip” represents the average futures price for natural gas over the five month period of November through March. As seen on the above graph, for this 2011/2012 winter, the winter strip closed below $4/mmBtu, which is a 10 year low. The two big drivers of declining natural gas prices are increased supply, in the form of new shale gas reserves, and decreased demand, resulting from the weak economy.

What does this mean for electricity? In the Mid-Atlantic, natural gas prices and electricity prices are highly correlated. Commercial businesses in many locations are now seeing electricity supply (generation and transmission) prices below 8 cents per kilowatt-hour.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096 or email us at jmcdonnell@avalonenergy.us

Copyright 2011 by Avalon Energy® Services LLC