High oil prices. High gasoline prices. High natural gas prices. High diesel prices. High Electricity prices. Will this trend continue??
This is a common question we’ve received over the last several months. We can shake the Magic 8 ball or ask the Energy Swami, but we thought it might be better to answer this question by highlighting three key items we are watching.
Heating oil inventory levels in the U.S.
Current inventory levels are running at, or below, the 20-year low. Heating oil inventory also encompasses diesel fuel, which remains a prominent fuel used by the transportation industry. Refineries have already been running at high rates this year but haven’t been able to bring national inventory levels back into the normal five-year range.
If this fuel remains near the low levels of the last two decades, look for refineries to keep consuming large amounts of oil. Low heating oil inventory and high crude consumption usually equal bullish support for energy prices.
International natural gas prices.
We have another blog post focused on the impact of high European natural gas prices, but this second point concerns Asian and European values. For much of the spring and summer, Europe has had to out-bid LNG (liquified natural gas) cargoes headed to parts of Asia in order to meet Europe’s rapid growth. This has effectively increased natural gas prices worldwide.
If we start to see a narrowing price difference (narrowing spread) between any of the three major global natural gas prices – Henry Hub in the U.S., TTF in Europe, and the JKM in Asia – then we will be looking at a more bearish possibility for energy prices. Unfortunately, we do not see this happening over the coming months.
A change in forward curve structure.
This might seem like a fancy financial term, but it really asks this simple question: Are forward prices experiencing backwardation or in contango?
A backwardated market is one where the current price for a commodity is higher than its future price. The complete opposite of this is a contango market, meaning that the current price is lower than the future price.
Backwardation is usually bullish, and Contango is usually bearish. For all of this year, the energy markets (oil, fuels, natural gas, propane) have ALL been in backwardation.
Extremely low heating oil inventory levels, extremely high international natural gas prices, and multiple energy markets with forward price curves in backwardation are a recipe for continued bullish prices. If one or more of these items changes, so will price direction.
To learn more about the markets and how they impact your business, please contact the Twin Feathers team.