Ebf 301

EBF-301

“Fundamental Factors Impacting Crude and Natural Gas Pricing”

Crude Oil:

1) Weather – Heating oil, a crude distillate, is still used in several homes in the Northeastern US for space heating and hot water. This part of the country is the world’s largest consumer of heating oil. (And, many old industrial factories and power plants still use heating oil.)

2) Domestic Economy – the strength of the economy is a good barometer of energy usage overall. Indicators such as the stock market, manufacturing indexes, retail sales figures and unemployment numbers influence the perception of demand.

3) Global Economy - In addition, crude oil has truly become a global commodity so; world economic factors impact oil prices. (The health of the Eurozone, China’s manufacturing, etc.)

4) Currency – the strength/weakness of the US Dollar vs. other currencies directly impacts crude oil prices. Foreign investors trade crude oil contracts which are priced in US dollars and cents. Thus, if the dollar is weak, foreign investors can buy more crude contracts with their currency. On the other hand, when the US dollar strengthens, foreign investment lessens and crude prices tend to fall. There is a very high correlation between these two.

5) Geo-political situations – unrest in any oil-producing region gives uncertainty to supply and, therefore, to prices. The current situations in Egypt, Iran, Syria and, the pirating of oil tankers by the Somalis, all give rise to concerns about crude oil interruptions. In Nigeria, the rebel group, MEND, has disrupted the shipment of crude oil by attacking facilities owned by Royal Dutch Shell.

6) Cross-commodity Markets – the price of crude can be impacted by the change in the price of the products derived from oil such as, gasoline and heating oil. And, the price of Brent North Sea crude influences the WTI price.

7) Changes in Inventory – Every Wednesday, the US government reports the change in the amount of crude oil that is in the nation’s storage facilities (http://ir.eia.gov/wpsr/wpsrsummary.pdf). Increases in this are deemed to be “bearish” (supplies have increased) while decreases are seen as “bullish” (there was demand for the inventory).

8) Baker Hughes Drilling Report of active rigs - this oilfield service company keeps track of total number of rigs actively drilling for oil and gas, and they report the statistics weekly. A rise in rigs means more potential supply coming-on down-the-road. A drop in the rig count could mean less supply down-the-road.

Natural Gas:

1) Weather – Natural gas is definitely a domestic North American commodity. It is no longer influenced by world events or even the price of crude. So, the biggest factor affecting price is weather. About half of US homes use natural gas for space heating and hot water. In addition, about 25% of all electricity is generated with natural gas. This amount is actually increasing as the cheaper gas prices of the past several months have led to switching from coal to natural gas.

2) Economy – the same factors that impact crude oil prices have an effect on natural gas prices.

3) Changes in Inventory – The US government also reports the weekly change in the nation’s natural gas storage (http://ir.eia.gov/ngs/ngs.html). Similar dynamics to crude inventories apply.

4) Power Generation – the mix of nuclear, coal, hydro and wind impact natural gas prices. But, weather still dominates the demand for power and, as a result, the demand for natural gas usage.

US Nuclear Plant status report: (http://www.nrc.gov/reading-rm/doc-collections/event-status/reactor-status/ps.html) The level of nuclear generation impacts the use of natural gas for power generation. sure