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86 comments on Economides: $100/bbl oil and $20/McF NG before the year is out...

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Fred on September 26, 2005 - 1:55am Permalink | Subthread | Comments top
Fear about gas prices is palpable, though not what you might think.

My gas company just sent me an offer to lock in a fixed monthly cost of gas. I have to sign up for a year and I have to pay a fixed amount regardless of where gas prices go.

Why would they do that? Ans: They want to use me to hedge against the price of gas falling sharply. You can smell the fear.

$10 by Christmas.

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sekiyu on September 26, 2005 - 2:04am Permalink | Subthread | Parent | Comments top
Fred, you don't say what price they want you to lock in at. Also, do you project sharply declining prices due to dropping demand or massive increases in supply? If the former, why would demand crash in the middle of winter? In the latter, where will it come from?
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mw on September 26, 2005 - 2:26am Permalink | Subthread | Parent | Comments top
Natural Gas prices have peaked at 10 before, but NEVER in the summer.

http://futures.tradingcharts.com/chart/NG/M
Monthly chart - NG futures (that chart is behind the times it doesn't show the september bar but serves the purpose)

That chart is what we call a 'breakout'. In the early days following a breakout, there is always risk that price fails to hold, and the resulting reversal creates significant selling pressure on the market or commodity.

The thing is... that break out happened last month and its holding up rather well so far.

Looking at shorter time frame charts, I do not, at this time, see such an event happening.  Even if price does reverse significantly and soon, the first thing most energy traders will be expecting to see is for support to hold above 10$.

Long before 10 becomes even a remote possibility this fall/winter, first there are a number of key levels where traders will expect support to hold before price will even have a chance of retreating to 10$, as I noted in another comment thread here this evening.

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tom deplume on September 26, 2005 - 4:56pm Permalink | Subthread | Parent | Comments top
I find it interesting though only coincidental that NG hit $10 for the first time in Dec 2000 about the same time the Supreme Court appointed Bush.
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Fred on September 26, 2005 - 4:29am Permalink | Subthread | Parent | Comments top
I am observing behavior that indicates the gas company seriously wants to hedge against falling gas prices. I don't need to know the details of their analysis to see that is what they are doing.

My own assessment of gas supply is irrelevant to all this. I'm an observer of a dog barking in the night.

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Glenn on September 26, 2005 - 10:19am Permalink | Subthread | Parent | Comments top
Fred, perhaps they are hedging against $20 for you, expecting that they will be the ones who have to deal with irate customers? Just a thought. What was the price they offered?
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viget on September 26, 2005 - 12:54pm Permalink | Subthread | Parent | Comments top
There is an alternative explanation, which is actually 180 degrees from your assessment.  Most public service nat gas utilities are heavily regulated at the retail level, meaning, in order to raise rates they have to go before a public service commission to approve the rate hike.  If they think wholesale gas is going to continue to stay at the high price now, or even go higher, they're going to want to lock you in at that high price now, to hedge against all those customers who don't lock in.  Why?  Because the PSC may decide to implement price celings as a polically palatable solution, and the nat gas utility is going to take a major hit on these customers who are paying artifically lower prices because a rate hike just wasn't going to go over well.  So why not try to scare more "reliable" customers into locking in at a higher rate to offset that possibility?  At least this way they don't lose as much.
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mw on September 26, 2005 - 2:19am Permalink | Subthread | Parent | Comments top
Why would they do that? First, you need to determine whether your gas company is a mere middleman or is a gas producer.

My gas company, for example, is simply a transport co - they don't make a mark up on the gas itself, technically speaking. Regulatory restrictions get in the way of that. If a fixed price loophole allowed them to make a few cents they might not otherwise be able to make, I can see such companies doing this.

Even if they are able to generate profits on gas markup, you can't know off hand what their motivation is... but generally its to smooth out the bumps in revenue. Clearly they only sell at a certain price if they've bought it already cheaper, or if they believe that price will head lower in the future. Certainly there's some reason to believe that today's 12$ gas will not be 12$ in April 2006 (bu might be again by July 2006).

However, we should remember that many - probably most - companies are bad at hedging, especially in volatile (up and down) markets.

PS: I've not looked into this, but I bet there are also loopholes in regulatory processes that allow a NG or energy supplier to offer fixed rate energy at higher prices per btu than what the regulated price would normally allow for.

While its different in all jurisdictions, commonly an energy supplier will have to apply for rate increases and the pace of approvals of same isn't likely to keep up with markets moving as fast as they are. If a fixed-price loophole exists in a jurisdictions regulatory environment, you can bet they are going to take advantage of that.

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bhyde on September 26, 2005 - 11:17am Permalink | Subthread | Parent | Comments top
"My gas company just sent me an offer to lock in a fixed monthly cost of gas. I have to sign up for a year and I have to pay a fixed amount regardless of where gas prices go"

This sounds like what my gas company calls "balanced billing" which if you read the fine print has two ways they eliminate the risk.  First they can adjust the amount depending "if your usage changes" and secondly "At the end of the billing year, any difference between total payments and actual energy costs will be added to or subtracted from your last bill of the budget year."

That said it's entirely possible they bought strips of futures and decided to sell them to you at a nice profit.  A consumer facing offer like that takes months of planning and execution.  So the offer would have been planned in say Apr, the billing systems and mailings set up in Mar.. July, the mailings sent in August - in which case they would have bought the strips in July or August and right now they are thinking ... humm I wonder if we can make it really hard for people to take us up on this offer.

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86 comments on Economides: $100/bbl oil and $20/McF NG before the year is out...

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