Capstone Energy Services


Natural Gas Prices Continue to Slide

November 8th, 2010

OMAHA (Capstone Energy Services) – Last week, the Federal Reserve announced a new program of quantitative easing (dubbed “QE2”) in which the Fed would make sizable purchases of government securities. The purpose is to stimulate the economy, avoid economic stagnation and reduce the risk of deflation. The initial effect of this announcement has been a sharp decline in the U.S. Dollar in relation to other currencies to the lowest level in nearly a year. This Dollar decline immediately led to sharp increases in commodity prices, particularly international commodities such as crude oil, metals and grains. Crude oil jumped nearly $2.00 in early trading on Thursday to a five month high of $86.50. Gold is up over $30 per ounce and other metals and grains are up 1.5%-4%. Natural gas is only slightly higher, being primarily a domestic market and avoiding the market effect of international currencies. Higher crude oil will lead to higher gasoline prices and fuel oil prices relatively quickly.

The intent of the Fed action is to stimulate the economy and accelerate economic growth without excessive inflation. If the action is successful, the economic growth will lead to increased energy demand, keeping international commodity prices up and raising other domestic energy costs such as natural gas and electricity. It will take time to see the results of the Fed action. 2011 still looks to be a relatively slow growth year with continued high unemployment. However, there are signs that the economy is slowly beginning to improve and the Fed action could result in higher 2011 economic growth than expected.

While U.S. natural gas and electric prices are not directly affected by the currency move and international energy prices, longer term this could change. A number of applications have been filed with the Federal Energy Regulatory Commission to install liquefied natural gas export facilities. Currently, the U.S. only imports LNG and is considered a swing market for LNG because of the extensive available storage capacity. However, with the current excess supply and depressed price of natural gas, exports are a logical option. If the U.S becomes an exporter of natural gas, the price dynamic will change, thereby affecting natural gas and power prices longer term.


By Ed Freeman

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Energy Facts

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