NRG Energy (NRG) is not solely dependent upon natural gas like some other energy companies are, so we decided to look at the energy fields it is involved in and see how their prices are predicted to move. These price movements will have a great effect upon NRG and help us decide whether it is good for long-term now.
NRG Energy, Inc., together with its subsidiaries, operates as a wholesale power generation company. The company engages in the ownership, development, construction, and operation of power generation facilities. It is also involved in the transacting in and trading of fuel and transportation services; the trading of energy, capacity, and related products in the United States and internationally; and the supply of electricity, energy services, and cleaner energy and carbon offset products to retail electricity customers in deregulated markets.
NRG Energy's operations benefit from low, stable fuel prices (coal, oil, natural gas, nuclear fuel). Because NRG's power station portfolio possess a fleet of diverse fuel sources, price fluctuations in one of any of the above fuels affects NRG operating costs. Therefore it may be important to look at these fuel costs and where they are going.
Global coal prices were expected to rise by 5% in 2012, but now, coal in Asia is unlikely to recover in 2012 from its first decline in three years as electricity price controls prompt Chinese and Indian utilities to limit purchases of the fuel. Power providers in China and India, Asia's biggest energy users, are struggling to recoup their costs as governments restrict prices to curb inflation, reducing the incentive to boost electricity generation from thermal coal.
Demand issues are not limited to Asia, last week TECO Energy (TE) lowered its coal sales forecasts for 2012 in the face of weaker demand and declining coal prices. TECO Coal owns and operates low-sulfur coal mines and handling facilities in Kentucky, and Virginia.
Oil prices hovered above $106 a barrel Wednesday in Asia, amid concern that conflict over Iran's nuclear program could lead to global crude supply disruptions. Oil has jumped from $96 earlier this month amid escalating tension between Western powers and Iran.
Predictions for the future? Here's one based on the available pointers: Tighter oil supplies in 2012. In fact, brace yourself, a potential demand surge could, in essence, bring this faraway calculation of next year, nearer by three months. And with it a higher price for oil. Last month, the IEA announced release of strategic oil reserves to the market through August. Historically, such a measure is taken during desperate times like war.
Natural Gas Prices
Natural gas prices have been falling since last summer amid a production boom and relatively weak demand. But prices dropped to 10-year lows in January and have stayed there, as mild winter weather has cut heating demand, creating a record surplus. The low prices are good news for companies that sell power to retail customers. But they're terrible for power-plant operators who sell electricity on the wholesale market. After U.S. gas production in 2011 grew at a faster rate than demand, production and demand are likely to grow at roughly the same pace, about 2% in 2012 and roughly 1.5% in 2013, according to a forecast this month by the U.S. Energy Information Administration.
That's for now, but NGR itself is predicting that natural gas energy prices will rise as it is set to become the second energy source in the world after oil.
With the mix in fuel prices presently, NRG operating costs may balance out, but make no mistake, the natural gas price slump has hurt it. We would like to see the industry level out and start moving up before we would put our money here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.