There is a lot of discussion about the recent “spike” in natural gas prices.  It is alarming when you see 3-5% increases in electricity prices in a few short weeks.  Let us remember, however, that we continue to remain at all time lows.  We continue to be at relative low electricity prices due, at least in part, to relatively low natural gas prices.  This graph shows the historical weekly average spot price for natural gas and oil.  It is instructive in the sense that it illustrates how low natural gas continues to be, and how low it is compared to oil prices as well.

A colleague introduced me to a very thoughtful perspective on natural gas price forecasts, what is driving those markets, and what we should expect. Take a look here.  WTRG Economics takes a look at the fundamental price drivers for natural gas. He points out that because we had a mild winter, we have had strong gas storage numbers and low consumption.  As a result, natural gas is now price competitive with coal.  Utilities are now burning more gas (this analysis is further supported by this article from Bloomberg). Nevertheless, natural gas prices (and, as a result, electricity prices) remain low. If you read on through the piece, you see that WTRG forecasts a rebound some time in the Fall. Production should continue to decline, and when storage numbers also drop, he predicts an increase in natural gas prices.  James Williams writes:

Prices should start to firm when the excess gas in storage falls from the current 900 Bcf to 400 Bcf. The X-factor in the timing is weather. A hot summer will move the date up and a cool one could delay it until November or December.

The Bloomberg article also notes, however, that utilities are concerned about becoming too dependent on natural gas given the volatility of the fuel.  Sometimes it is appropriate to call for caution.  Some customers we talk to think that low natural gas prices are here to stay.  In fact, we have seen a lot of volatility in natural gas prices over the last 4 years— as the graph above shows we saw prices >$10/MMBtu as recently as 2008.  The price of natural gas (and electricity) more than doubled, and then dropped by half, and half again.  This kind of market movement wreaks havoc on budgets and forecasts.

The bottomline:  There is no need to panic….