August 27, 2009 admin

Natural Gas and a Barrel of Oil Disconnect in Price Correlation

Last week we saw a complete separation of the correlation in price among natural gas and oil. Last summer (2008) there was a strict correlation as both natural gas and oil reached historic price levels with gas above $13 mmBtu and oil above $140 a barrel. This summer (2009) natural gas falls below $3 mmBtu and oil is traveling above $74 a barrel. Why are we reporting on natural gas price on an electricity rate site? Texas electricity has a 90% correlation with natural gas because 40% of our power generation comes from natural gas. Our peak demand load relies on natural gas in storage which means Texas can have volatile price swings especially in the summer when air conditioners get cranked on. The challenge is in keeping enough natural gas in storage to meet this peak demand. Right now we have plenty in storage which is why natural gas and electricity price continue to travel down. When natural gas price in Texas travel down it is a sure bet that electricity rates will follow.

Oil is not dependent on what natural gas price do but last summer with a little different as there were some powerful factors causing any fuel commodity to go up in price. Many blame it on investment banks using commodities as a kind of hedge against bad security investments. Others believe that investment banks who have interests in the raw materials of natural gas and oil were at the same time heavily advertising investment in commodities as an investment product. The conspiracy was that since these banks had interests in the raw materials they had a stronger incentive in selling the commodities similar to how they would sell securities to their investors. Anyone who bought at the top of the market lost any gains as the prices fell hard in just a few months. For those who were brave enough to hold on until even now we are about half way back up in oil price from the record $140 high. Natural gas prices however are still way down from their $13 mmBtu prices of last summer 2008.

Now is a perfect time for electricity consumers to lock into a term fixed electric rate while prices are low. Longer term contracts will cost you more because of the way these prices are based on the commodities futures markets. If you have to pay %10 more to sign a 3 year fixed electricity rate contract over a 1 year contract it is worth as you are locking in near a bottom. This will allow you to take advantage of getting in at the bottom of the Texas electricity market. Most people however prefer to go with the “cheapest price” which would be a 6 month or 1 year term although a year from now the argument could be made that electricity rates are unlikely to remain this low which would force you to renew at a higher price than even what the 3 year rates are currently showing. Because of this situation we are going with a 3 year fixed rate recommendation for our customers on which electricity rate contract to pick.

You can compare electricity rates in your area by clicking on the compare link above if you need to compare residential electricity prices in Texas. If you need a commercial Texas electricity rate comparison just click on our contact link above.

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About the Author

admin Donny started back in 2007 from his parents basement and has since married his wife Melody and had three sons, John Adam (7) and Noah (4) and our new 20 month old son. He enjoys tech related things, softball, kickboxing, going to the gym, excursions and activities together with his wife Melody. Our service allows you to shop and compare commercial and residential electric rates and providers. Would you take the time today to try our service and see how you like it. Thank you! and God Bless You!

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