Energy Costs

Welcome to the uncertainty of the New Year.

Natural gas will remain a significant product in producing electricity, especially in Texas, and therefore continues to bear watching as the price of gas runs somewhat in parallel with electricity prices. The price of oil, on the other hand, has little to do with the price of natural gas or electricity, but has a huge impact on the economy, especially in Texas.

We are seeing some of the lowest prices for electricity and natural gas in the last two years. Natural gas is trading on the current contract near $2.90 today, a little above the $2.80 low point it hit within the last couple of weeks. It appears now gas has built a significant price ceiling around $3.25, and will not go higher unless we have a major change in the weather up north.

This week’s natural gas storage report that came out yesterday showed a draw down of 131 Bcf. Even though the average analyst forecast, as surveyed by the Wall St. Journal, was for a smaller draw of 119 Bcf the market was fairly steady. The reasons are two-fold:

1) the weather next week is expected to once again this winter be ABOVE normal for this time of the year; and more importantly 2) production continues to set records for natural gas.

In December (2014) natural gas production reached another new record with 72.8 Billion cubic feet produced on an average per day. That is with a rig count that decreased by 12 down to 328 during the month. We may see a slowing in this growth in future months and throughout 2015.

Gas in storage dropped 131 Bcf last week, but this is favorable to the average 5-year draw down of 145 Bcf and the 157 Bcf drawn down last year. The current gas in storage is now only 67 Bcf below the 5-year average. You may remember the April figure exceeded 1,000 Bcf in storage below the 5-year average. As gas continues to be produced at the record pace of late this gap continues to shrink. We now have 250 Bcf MORE gas in storage than during the corresponding week last year. Thus – prices of gas and electricity are at two-year lows.

Will this continue? In October there were 1,609 oil rigs drilling for oil. The Saudis decided about then not to reduce their production which dropped oil prices throughout the world to lows, today under $50 for a barrel of Brent crude. West Texas crude has dropped to $47. The very important rig count has now dropped to 1,482 active drilling rigs for oil. Still, that is 104 above last year’s mark.

My thoughts are the Saudis will continue to pump oil because they are in a war without firing a bullet. They are hurting the US shale/fracking oil production with lower prices, and they have destroyed the budgets of countries like their enemy Iran, Russia, and Venezuela. Most US oil producing companies have cut their capital expenditure budgets (drilling, etc.) by 20-50% for this year. That will have a big affect on the economy in areas like Texas (Eagle Ford, etc.) and North Dakota. I see a small economic slow down in Texas that will probably last the next two years.

Overall, energy prices should remain low throughout 2015. I think natural gas and electricity prices will remain low for the next two years. Stay turn for the weekly reports on storage, and let’s see how long the Saudis play their economic card.