Understanding Commodity Relationships
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:

1. We have brokered offers from suppliers that are considerably lower than their unsolicited offers on the same accounts under similar market conditions.

2. 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.

3. 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.

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