Living on the Edge

Deck: 

Putting natural-gas price volatility into hurricane-season perspective.

Fortnightly Magazine - August 2006
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The natural-gas and oil price run-up since hurricanes Katrina and Rita has subsided somewhat following a warmer than usual winter, record natural-gas storage levels, and successful conservation instituted by many gas and electric utilities in recent months. However, new sources of supply concern—such as occurred in Europe with accusations of gas-supply withholding between former Cold War adversaries—have rekindled calls for greater diversity of supply across Europe. Developments in the Middle East—especially in Iraq and Iran—and elsewhere in Africa also are lifting world oil prices through increased “security” premiums being sought by producers or traders holding long contracts.

For North American energy consumers, even such far away events indirectly affect energy market prices. In the current environment of razor-thin excess productive capacity margins for both oil and gas, even the slightest market hiccup abroad causes price volatility. For wholesale electricity prices, the run-up has driven up power prices across North America—again.

The warm winter—combined with record high prices—has caused a buildup of gas inventories in storage. The national storage levels as of Feb. 24, 2006, stood at 1,972 Bcf—48 percent above the five-year average of 1,331 Bcf for this time of year (see Figure 1). This level also is more than 2 percent higher than the maximum five-year average of 1,921 Bcf.

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