Look to partial hedges to counteract a short-term price jump. Extreme volatility in crude oil and natural gas is causing widespread concern about energy costs. Crude oil—which drives natural gas prices—reached almost $79/barrel on August 1st, breaking a July 2006 record. “The general perception is that supplies are tight,” says Michael Bush, president and CEO of Energy Vision, an energy management and consulting company. “But the fact is, prices are inflated right now. There’s actually a strong inventory of both oil and natural gas.”
Bush doesn’t expect to see natural gas prices falling much below $6 per Dth or 60 cents per therm during September.
The main drivers for the summer-fall market are hot weather demand and the potential of hurricanes interrupting supply. Although this year’s Atlantic and Gulf Coast hurricane forecast was lowered by weather researchers at Colorado State University, experts still predict 2007 will be more active than usual. Energy stock traders are keeping a close watch on this prediction—fierce storms that enter the Gulf of Mexico can threaten the region’s hydrocarbon production.
Since natural gas is the primary fuel source in many states and can significantly impact your electricity costs, Bush recommends a hedging strategy.
“Ask your supplier if they can enter into partial hedges,” he suggests. “Then try to fix costs for 75 to 100 percent of your natural gas deliveries through October and half your deliveries from November through the winter months, having third parties [in deregulated markets] put the excess into storage, if necessary.”
He predicts prices should come down in early 2008, so long-term hedging is not a smart option.