The July natural gas wholesale exchange contract rallied 12 cents upward yesterday as hot weather persisted through much of the South. The volume was a little above average as the market continued to show “how high it can go”. With the media printing articles predicting natural gas usage doubling by 2035 and using phrases such as the “golden age” of Natural gas, it certainly seems easier to take a bullish (beliefs that prices will go higher) stand these days. But the short term is still ruled by Mother Nature and if the heat in the South and East coast hangs around, there is no reason we have seen the high just yet. The other bullish news that lifted the market yesterday was the news of a low pressure system just east of Central America. However, this formation will not affect Gulf production and the total percentage of US production coming out of the Gulf is down to about 8.5 to 9.0% but when the hurricanes begin to appear, all energy traders get a little skittish as do natural gas prices being either up or down based on the storm trajectory.
On the global front this week, the increasing abundance of cheap natural gas, coupled with rising demand for the fuel from China and the fall-out from the Fukushima nuclear disaster in Japan, may have set the stage for a "golden age of gas," the International Energy Agency (IEA) said Monday. Under a scenario set out by the IEA, global consumption of natural gas could rise by more than 50% over the next 25 years, with it accounting for more than a quarter of global energy demand by 2035, up from 21% now. But while natural gas is more clean-burning than coal and oil, it is still a domestic market in the short run while the IEA believes that the commodity will take steps towards becoming a truly global market over the next two decades. But pure globalization is far away. The price of the commodity in key regions, including much of Europe and Asia, will remain anchored in decades-old practices: long-term contracts indexed to the cost of oil or refined oil products. As such, natural gas prices do not reflect the supply and demand fundamentals for that commodity, but rather those of the oil market. Over the last decade the natural gas market has moved towards so-called gas-to-gas pricing, in which the commodity is priced against its own spot market rather than against the cost of oil or fuel oil. Gas-to-gas is the pricing mechanism of choice for much of North America, the UK and Australia. In total, it accounts for about a third of global natural gas supplies. But the rest is sold largely based on oil prices, in spite of demand for reform from European importers. In Asian nations such as Japan, however, the pressure to reform the pricing system is significantly less.
On the deregulated front yesterday, it seems according to one unregulated marketer, a properly functioning and competitive retail electric generation market does not exist in Pennsylvania, Direct Energy said in comments to the Pennsylvania PUC, arguing that the retail markets are progressing only as far as the current default service structure will allow. Their recommendation was that the PUC require that the default service function in each service area be transferred to one or more alternative default service providers by June 1, 2013, like in Ohio with the SSO and SCO functions for default service being auctioned off every February for service beginning on April 1st. While migration rates in several territories have been touted as successes, Direct noted that for small volume customers, the vast majority of these customers remain on default service, even in the most active territories, despite annual savings being proven to be in the vicinity of $100-$150 per year by choosing an alternative supplier over the default service.