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International Economic Uncertainty Returns

November 18th, 2010

OMAHA (Capstone Energy Services) – The world economic recovery became a little more tenuous this week, as signs of difficulties became more evident. Inflation concerns were heightened in China, South Korea and India as those countries initiated some financial tightening. In Europe, the sovereign debt problem specifically for Greece and Ireland re-emerged with default concerns making news. The uncertainty created by these events led to a resurgence of the U.S. Dollar and a broad based sell-off in commodities. The U.S. Dollar index to other currencies has moved up 5% from lows earlier this month while the DJ-USB Commodity index fell more than 10% after rising more than 30% since last June. Energy commodities tied to international economic events also declined during this last week: Crude oil is down nearly $6.00 per barrel or 6%; Gasoline is off $.11 per gallon or 5% and #2 fuel oil lost $.15 or 6%. Natural gas is down 10% in the last week, but responding more to weather, storage and technical volatility than to international events.

In the short term this week’s activities will likely result in some lower gasoline prices at the pump and some slightly lower heating oil costs. Longer term, however, the outlook is far less certain. Economic growth in the emerging economies is still expected to be robust and this new European debt crisis will likely be resolved. As a result, there may be a slowing, but not a reversal, of the recovery and resulting increased demand. While short term prices have recently responded to international economic and currency fluctuations, longer term the fundamentals of supply and demand control. One noted analyst suggested this week that $100 oil will be a “fair price” in 2011.

Natural gas prices will likely remain low well into 2011. With storage at record levels and production remaining strong, without significant cold weather or other unexpected events to increase demand or reduce production, the oversupply will keep prices depressed. Since natural gas is the incremental fuel for power generation and a major factor in wholesale power pricing, we can expect wholesale power prices to also remain low into the first quarter of 2011. It appears that the widening price disparity between crude oil and natural gas will continue for now — but pressure is building to export natural gas and expand its use in power generation and transportation, as the value proposition between the two energy sources becomes too much to ignore.

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By Ed Freeman

Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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