The overall direction of the commodities markets has changed very little over the last few months, with prices continuing to fall for most terms driven by weak demand, a weak economy and uncertainty regarding the potential for a turnaround in the short-term.
Natural gas prices started off in January at $5.971 for the prompt month and they are now at $3.54. This continued decline has resulted in the lowest prompt settle since September 2002. The weak economy continues to suppress demand, while domestic supply output continues to be robust.
Electricity prices in Zone J in New York continue to follow natural gas prices and have reached the lowest levels since 2005. Prices for the balance of 2009 and Calendar 2010 are at the market low over the past four years, with the balance of 2009 in Zone J currently sitting at $54.14 around the clock (ATC).
So-Where We’re Going? The summer power prices have dropped tremendously over the last three months, with July and August 2009 currently trading under $80 for On-Peak. To put this into perspective, the last time Day-Ahead prices in the July-August timeframe in Zone J were under $80 was back in 2004. However, Calendar 2010 and beyond carry the most upside risk when it comes to forward prices due to potential economic recovery, declining rig counts and possible production cuts. While there could be further decline in the prices for 2009 and 2010, the upside risk is far greater than the downside potential.
The economy remains the primary market driver causing prices for 2009 to be the lowest in more than five years and making a near-term rally very unlikely without a major market surprise. Based on one’s appetite for risk, there is strong justification for executing buys at current levels and buyers should consider all terms contingent upon their ability and willingness to buy long-term.
The future of the economy also remains one of the biggest questions in terms of whether or not the market has hit the bottom or if there is more downside potential. In addition, factors such as reduced drilling activity and demand increases, along with weather, geopolitical events, natural disasters and market surprises could incite a rally in prices.
