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Natural Gas Market Update

Over the past 12 months, natural gas prices have fallen 52%.

Looking ahead, the graphs below each look at natural gas prices in the futures market starting at two different points in time: June 24, 2014 and January 5, 2015.  The first graph extends two years into the future and the second graph five years.  The “average price” represents the simple average of all of the futures month prices in each series.  Since June, natural gas prices over the future 24 months have fallen about 26% and over the future 60 months about 19%.

Natural gas (and electricity prices) are currently attractive making this a good time to consider locking in your supply needs.

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

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2015 by Avalon Energy® Services LLC

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Are Crude Oil and Natural Gas Reconciling?

Crude oil prices have dropped 38% since June for two reasons.  Shale oil production in the US Bakken, Eagle Ford, and Permian basins has increased dramatically – by more than 4 million barrels per day since 2008.  At the same time, worldwide demand for crude oil has declined as a result of slowing economies in China and Europe.

Starting in January 2012, the US crude oil benchmark, West Texas Intermediate (WTI), bounced around $100/Bbl (dollars per barrel), rose above $105/Bbl in June this summer, and is now trading below $65/Bbl.  Natural gas prices fell below $2.00/mmBtu (dollars per million British Thermal Units) during April of 2012, rose above $6/mmBtu during the Polar Vortex during January of this year, and have since fallen below $4.00/mmBtu.

The graph below presents crude oil and natural gas prices on an energy equivalent basis in common units of $/mmBtu.  Starting in January 2012, crude oil bounced around $17/mmBtu, rose above $18/mmBtu in June this summer, and is now trading below $12/mmBtu.

We reported previously on the once wide gap between crude oil and natural gas energy equivalent prices:  Crude Oil and Natural Gas Get a Divorce and Crude Oil and Natural Gas Move To Different Hemispheres.

During April 2014, crude oil reached more than nine times the energy equivalent price of natural gas.  That ratio is now 2.8X.  The graph below shows how this ratio has fallen over the last three years.

While crude oil prices and natural gas prices exhibit little correlation, crude oil prices are highly correlated with fuel oil and diesel prices.  Implications of a declining crude oil to natural gas price ratio include:

  • As natural gas prices spike in pipeline capacity constrained markets this winter, it may be more economical to use fuel oil for power generation than natural gas.
  • The economics associated with converting residential fuel oil furnaces to natural gas become less compelling.
  • The economics associated with converting diesel or gasoline fueled vehicles to compressed natural gas or electricity will worsen, and the payback period associated with existing conversions will be extended further out in time.
  • US liquefied natural gas (LNG) exports will become less competitive in overseas markets where natural gas prices are contractually tied to crude oil prices.
  • Petrochemical facilities that can use both crude oil and natural gas as feedstock may switch more and more to crude oil.

It now appears that crude oil and natural gas may be moving back to the same hemisphere and, possibly, reconciling.

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

Notes:

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2014 by Avalon Energy® Services LLC

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Natural Gas Market Update

The above graph looks at natural gas prices going back to January 1997.

Natural gas prices have retreated from the Polar Vortex bump and remain relatively low by historical standards.

The prices plotted above are not adjusted for inflation.  If they were in 2014 dollars, the left side of the curve would be more elevated.  In real dollars, today’s prices are lower than they appear on the graph.

Looking to the futures market, the effects of the Polar Vortex lingered into the summer over concern about whether or not there was sufficient supply of natural gas to refill storage after the dramatic drawdowns during January and February.

This is highlighted on the left side of the blue line above which plots the 36 month futures curve as of 4/29/14.  This curve is backwardated, meaning the months close in time were priced above the months further out in time.

The near dated months have since retreated as concerns about storage refill have diminished because of (a) greater natural gas production than expected, and (b) unusually mild summer weather reducing summer time electricity load and the related reduced demand for natural gas.

This is highlighted on the red line above which plots the 36 month futures curve as of 10/24/14.  The months closer in time have declined significantly with the December ’14 contract down $1.26/mmBtu or 25%.  The entire curve has declined as well, though to a lesser extent.   The futures curve is no longer backwardated.

The table above shows the simple average of the monthly prices of the 36 and 48 month forward curves as of 4/29 and 10/24.

Overall, the 36 month futures curve is down 14.7% while the 48 month curve is down 12.7%.

The graph above looks further ahead at the 60 month futures curve which indicates that the market expects prices to rise.

While the curve is upward sloping, five years into the future, natural gas is trading well below $5/mmBtu.

Summary:

Over the past six months, market sentiment has swung from concerns that natural gas supply cannot keep up with storage injections – and upcoming winter demand – to the reverse.  Now the talk is more about an oversupplied market.  While there is low correlation between crude oil and natural gas prices, the recent decline in crude oil prices has contributed to overall bearish sentiment.  Generally, the best time to go long is when the market sentiment is most negative.  We may be approaching that point for natural gas.

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

Notes:

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2014 by Avalon Energy® Services LLC

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In The News – Avalon Energy Services

Avalon Energy Services recently completed an electricity procurement project for KBS Capital Advisors’ One Washingtonian Center property in Gaithersburg, MD.  Marc Deluca, Regional President of KBS, noted that “Electricity markets have exhibited extreme volatility.  The folks at Avalon Energy Services have deep expertise and an unsurpassed understanding of the energy markets and how they work.  With their advice and counsel, we were able to successfully navigate our way to a very positive outcome. “

Click here for the full story.

Avalon Energy Services also recently became licensed by the Pennsylvania Public Utility Commission to assist commercial, industrial and governmental natural gas customers in all of the natural gas distribution company service territories in the Commonwealth of Pennsylvania.  These are:

  • Columbia Gas of Pennsylvania
  • National Fuel Gas Distribution Corporation
  • PECO Energy Company
  • Peoples TWP LLC
  • Peoples Natural Gas Company, LLC
  • Peoples Natural Gas, LLC – Equitable Division
  • Philadelphia Gas Works
  • UGI Utilities, Inc.
  • UGI-Central Penn Gas
  • UGI-Penn Natural Gas
  • Valley Energy, Inc.

Avalon Energy Services is now licensed for electricity and natural gas in Maryland, Pennsylvania, New Jersey and the District of Columbia.

Copyright 2014 by Avalon Energy® Services LLC

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40% Reduction and Volatility Avoided

Our recent press release was picked up by numerous news outlets.  Click here to see how it was reported by the Wall Street Journal’s Market Watch.

In summary, Avalon Energy Services, LLC and our project partner, Ameresco, successfully completed a second natural gas procurement process for the District of Columbia Department of General Services (DC DGS). Under its initial supply contract, DC DGS experienced an estimated 40 percent reduction in the price it pays for natural gas supply.  This second round allowed the District of Columbia to avoid the extreme volatility in natural gas prices that occurred during this winter’s heating season.

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Market Update, November 6, 2013

For buyers, pricing in the wholesale natural gas market is attractive.

The graph below shows natural gas prices over the past ten years.  While we are not at the absolute low, we are near the bottom.

The next graph shows the 24 month forward curve for natural gas.  The line is upward sloping, meaning the market expects prices to rise in the future.

The story is similar with electricity as the two markets – natural gas and electricity – are highly correlated in the Mid-Atlantic.

It is a great time to be a buyer.

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

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2013 by Avalon Energy® Services LLC

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Real Energy Cost Savings

Below are the results from a sampling of reverse auctions conducted for Avalon Energy Services’ customers, including customers of varying size, over the past few months.  The first graph shows the customer’s annual energy costs before competitive bidding (blue line) and after contracts were executed on accepted bids (red line).  Pre-auction annual energy costs ranged from $0.7 million to $9.6 million, while post-auction costs ranged from $0.5 million to $5.6 million.

This translates into savings from about $0.2 million to about $4.0 million per year, as shown on the graph below:

Annual savings on a percentage basis are presented in this third graph and range from 27% to more than 40%.

Of course, past performance is not necessarily an indicator of future results, but in our experience, a well-executed and carefully managed reverse auction will achieve the most advantageous results for a customer.  The key is to use a skilled energy consultant who can effectively analyze your needs, customize a solution, and successfully use competition among suppliers to bring about the optimal energy procurement outcome.

Evelyn Teel contributed to this article.

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

Please feel free to share this blog.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2013 by Avalon Energy® Services LLC

 

 

 

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Best Friends? – Natural Gas and Electricity Prices – An Update

By David White

In a post from January 2012, the declining correlation between the price of natural gas and the price of electricity was explored (click here).  At that time, the correlation between the two was declining as a result of the greater recovery in electricity prices relative to those of natural gas.  The graphs from that post are presented below.

The graph on the left shows monthly average electricity and natural gas prices spanning January 1, 2001 through November 2011.  The graph on the right shows the correlation between the two.  This correlation peaked at 97.2% during May 2010, then declined to 45.4% during November 2011.

Since this post, both electricity prices and natural gas prices have generally moved upwards.  While they both have recovered, the difference between them has increased.  In other words,   Electricity prices have increased more than natural gas prices.  Plotted below is the continuation of electricity and natural gas prices through September 2012, displaying this recent rise in prices.

Despite the increased gap between electricity and natural gas prices, the correlation between them has increased significantly since the last posting.  This correlation is plotted below.

On the graph, the blue line represents the data presented in the January 2012 post, and the red line is the newly acquired data.  Since the last posting, the correlation between the prices peaked at 79.9% in April 2012 and, as of September 2012, is 71.9%.  This is a significant increase from the correlation value of 45.4% that was observed in November 2011.  Through last November, the correlation had an 11-year historical average of roughly 71% and is represented by the orange line on the graph.  While the correlation of electricity and natural gas prices has fluctuated significantly over the years and this pattern is sure to continue in the future, at the moment the correlation between electricity and natural gas prices is regressing to the historical mean.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484- 8096, or email us at whitedm02@gmail.com or jmcdonnell@avalonenergy.us.

Copyright 2012 by Avalon Energy® Services LLC

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Natural Gas Prices – Time to Hit the Panic Button?

Over the last 25 days, the daily spot price of natural gas at the Henry Hub has risen more than 30%.  This is a dramatic percentage increase over a short period of time.  Is it time to hit the panic button?  No.  In short, the percentage increase is so large because the base has gotten so small.

There has been much reporting in the press recently about how natural gas prices are at ten year lows.  While this is accurate, it does not fully convey how truly low natural gas prices have fallen.  The graph below shows daily spot natural gas prices since January 1997.

Over this 184 month period of time, the daily spot price has been as high as $18.48/mmBtu (2/25/03) and as low as $1.05/mmBtu (12/04/98).  The median price was $4.37/mmBtu.

The cumulative distribution graph below shows these historical prices.

For each price point, the graph shows how often prices have been at this point or lower.  For example, prices have been at or below $18.48/mmBtu 100% of the time and at or below $4.37/mmBtu 50% of the time.

The recent 4/20/12 low of $1.82/mmBtu is highlighted on the cumulative distribution graph below.

Over the study period, daily spot prices have been at or below $1.82/mmBtu ONLY 2.2% OF THE TIME.  This is an infrequent occurrence by historical standards.

The 5/15/12 daily spot price of $2.38/mmBtu is now highlighted on the graph below.


Prices have been below this price only 17.4% of the time.  Thought of another way, prices have been greater than $2.38/mmBtu 82.6% of the time.

While daily natural gas prices have run up, they are still low.

Notes:

–          Data are from the U.S. Department of Energy , Energy Information Administration

–          Prices are in nominal terms and are not 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 2012 by Avalon Energy® Services LLC

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Long Tailed Fish Swimming East

Markets adjust.  There are perhaps few better examples of that adage than the crude oil and natural gas markets.  One way of looking at how these two markets adjust is through the rotary rig count.  Baker Hughes keeps track of the number of active drilling rigs in the US (and also internationally).

Since July 1987, the number of active drilling rigs in the US has been as low as 488 (April 1999) and as high as 2,031 (September 2008).

The September 2008 rig count peak occurred three months after crude oil and natural gas monthly average prices peaked at $133.88/barrel and $10.28/mcf, respectively.  The rig count then followed the subsequent collapse of energy prices.  Crude oil fell to $39.09/barrel by February 2009 and soon thereafter, the rig count bottomed at 876 rigs in June 2009.  Since this bottoming in the rig count, the count has risen dramatically over the past three years to the current level of 1,945 active rigs.  The following graphs present historical monthly average crude oil and natural gas prices.

Baker Hughes also classifies operating drilling rigs by their primary target – oil or natural gas.  The rig count broken out by these two targets is depicted on the graph below.

Since the total rig count bottomed out in June 2009, the contributions to this total number between oil and natural gas directed rigs have changed significantly.  The number of natural gas directed rigs tracked the subsequent rise and fall of natural gas prices.  The number of crude oil directed rigs, however, has been on a one way track upwards, paralleling the sustained run up in crude oil prices.

Compared to the summer of 2009, today there are 52 fewer rigs exploring primarily for natural gas and 1,149 more rigs exploring for crude oil.

The graph below shows the active US crude oil and natural gas rig count on a percentage basis.

The change in focus from drilling for natural gas to drilling for crude oil has been a longer term trend, going back to the summer of 2005.  Seven years ago, about one in ten rigs were focused on crude oil.  Today, for more than two-thirds of the rigs, crude oil is the primary target.

So far we have looked at data back to 1987.  During this period, today’s count of 1,945 active rigs is close to the 2,031 maximum.  Looking back further in time, how does this compare?

Today’s total rig count is less than half the 4,530 rigs that were operating during late 1981.  Advances in drilling exploration techniques such as 3-D seismic, horizontal drilling and centralized drilling pads have increased success rates in exploratory drilling and increased drilling rig productivity.

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

Copyright 2012 by Avalon Energy® Services LLC