In This Issue
Recent Trading Strategy
Natural Gas and Crude Oil Markets Diverge
Resist the Temptation
Recent Trading Strategy

For the better part of a year a popular trading play has been "spread trading" between the U.S. dollar index and crude oil.  Traders make money as the price spread between the commodities widens.  In this case, traders sell down the value of our currency, and buy crude oil.  Since crude oil is a global commodity traded in U.S. dollars, a weaker dollar means it takes more dollars to buy the commodity and the price of crude goes up.  The falling dollar also sparks inflation fears and additional traders step in to buy crude oil as an inflation hedge.  This secondary effect has also helped push crude oil prices higher. The spread strategy has worked well for traders but a declining dollar and rising energy prices are ultimately a recipe for disaster for the U.S. economy.   In recent days, the New York Mercantile Exchange has increased margins requirements for several commodities that have suspiciously soared with little change in their market fundamentals.  The higher margins appear to be driving some of the weaker hands out of the market and prices for commodities such as silver and gasoline have plummeted.  This action by the exchange and the resultant price declines make a strong case that it is speculators causing these soaring prices.  Independent Energy Consultants applauds the Exchange for taking decisive action.  Our economy is still trying to recover from a recession brought on by high commodity prices and the last thing we need now is a return to the conditions of June 2008.  

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Your Energy Manager
Topic: Understanding Commodity Relationships

Welcome,

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Independent Energy Consultants, Inc. is committed to helping its clients make well-informed and cost-effective decisions regarding their energy supply and consumption. We are sending you this newsletter to help you understand how decisions made, or not made, affect your company's bottom line.

Natural Gas and Crude Oil Markets Diverge 

 

Several years ago we saw natural gas trade in line with crude oil and we watched both soar to all-time highs.  The strong positive correlation between natural gas and crude oil was commonly attributed to things like soaring demand for both in the emerging markets of India and China.  Other pundits talked about how natural gas prices were soaring because it was an alternative fuel for crude oil refined products like heating oil.  Independent Energy Consultants didn't give much credence to those theories then and we do not now.  We believe the run ups were a result of speculators seizing control of the commodity markets and flooding them with money from the equity markets.  Natural gas and crude oil were swept along as part of a larger commodities bubble, the likes of which we had not seen since the 1970s. Market fundamentals were set aside and momentum traders capitalized on fears being spun by large investment houses on Wall Street and financial show commentators.  Daily calls for $200-$400/barrel oil created a self-fulfilling prophecy - until the world-wide economy could bear no more.  And as with any bubble, prices came down further and faster than they went up. 

 

Since the burst of the commodities bubble (began in July 2008), crude oil and natural gas have gone their separate ways.   In fact, a popular trading play in the past year has been to sell natural gas and use the proceeds to buy crude and then reverse the trades when it was time to take profits.  The two commodities, once strongly positively correlated, have become negatively correlated.  Crude oil, as predicted several months ago by Independent Energy Consultants, has topped the $100/barrel mark.  Natural gas, conversely, remains low and range bound between $3.80 - $4.50/Dth.  We could write volumes on all the market fundamentals and technical factors that go into moving these energy prices, but that's not the point we're trying to make in this newsletter.  The point we're trying to illustrate is not to fall in love with any particular theory and don't ever think you've finally got the markets figured out. 

Resist the Temptation

With natural gas and electric prices (which are highly positively correlated) still trading at 5-7 year lows, it is likely that many customers will be presented with unsolicited offers or renewal/extension offers from their current energy suppliers. These offers may appear attractive, but we encourage clients to resist the temptation to act impulsively. We believe it is always a good idea to test the market and have suppliers compete for your business. Independent Energy Consultants offers the following observations as to why it is not in your best interest to accept an unsolicited offer:

  • We have brokered offers from suppliers that are considerably lower than their unsolicited offers on the same accounts under similar market conditions.
  • Suppliers change their view of the forward energy markets, or the cost structure of their portfolio can change. When events like these occur, we see a shift in which suppliers are providing the best price in the market.
  • We know that online auctions facilitated by Independent Energy Consultants on the WorldEnergy Solutions Exchange create fierce competition for our clients and squeeze supplier margins more than any other sourcing technique.

Let us show you how our proven sourcing process can provide the supplier liquidity, market discovery, price transparency, analytics and audit trail you need to make wise energy sourcing decisions. 



This email was sent to mburns@naturalgas-electric.com by info@naturalgas-electric.com |  
Independent Energy Consultants, Inc. | 215 W Garfield Road Suite 210 | Aurora | OH | 44202