Energy Price Comparisons

Understanding how energy prices are compared across different markets, commodities, and regions is crucial for making informed decisions, whether you’re looking to hedge risks, invest in energy assets, or simply reduce operational costs. This blog delves into energy price comparisons, the factors influencing these prices, and provides answers to frequently asked questions to help you make better energy-related decisions.

How to Compare Energy Prices

When comparing energy prices, it is essential to consider several factors, including the type of energy commodity, the region of purchase, and the market conditions. Here are some key points to consider:

Commodity Type

Different energy commodities (natural gas, crude oil, electricity, coal) have different pricing mechanisms. For example, electricity prices are often influenced by regional grid conditions and renewable energy output, while crude oil prices are impacted by global supply and demand.

Market Region

Energy prices vary by region due to factors such as local supply sources, transportation costs, and regulatory environments. Natural gas prices in North America (Henry Hub) differ from those in Europe (TTF) or Asia (JKM).

Contract Type

Prices can vary depending on whether you’re looking at spot prices (immediate delivery) or futures prices (delivery at a future date). Futures prices can provide insights into market expectations and are often used for hedging purposes.

How to Compare Energy Prices Using Vesper

To effectively compare energy prices across different regions and commodities, Vesper provides a comprehensive platform that allows you to visualise and analyse energy price data in a user-friendly format. On Vesper, you can compare various energy prices from different regions, including daily settlement prices for commodities like crude oil, natural gas, and electricity.

For instance, Vesper’s platform displays energy prices in their original units of measurement, such as USD/MT for crude oil, USD/MWh for electricity, and USD/THM for natural gas, providing an accurate comparison that reflects the distinct characteristics of each energy type. This nuanced view ensures you can see how prices stack up against one another in their respective markets.

Moreover, Vesper offers a feature to customize the currency in which prices are displayed, allowing you to convert and view prices in your preferred currency, such as USD, EUR, GBP, AUD, and others. This flexibility is particularly beneficial for international traders and stakeholders who need to evaluate energy costs in a currency that aligns with their business or investment strategy.

For example, you can compare the price of Brent crude oil on the ICE exchange with French power financial base prices and NBP natural gas prices simultaneously. The figure below from Vesper clearly shows the variations in price trends over time, with multiple y-axes to represent the different units of measurement. This multi-dimensional approach provides a clear and insightful comparison, helping you make informed decisions based on real-time data.

By using Vesper, you gain access to a powerful tool for monitoring and analyzing energy prices across various markets, commodities, and currencies, making it easier to navigate the complexities of global energy markets.

Regional Variations in Energy Prices

It is crucial to consider different energy prices depending on the continent when trading agricultural commodities. This is because the impact of energy prices on agricultural production and costs can vary significantly by region due to differences in energy usage, dependency on specific energy sources, market dynamics, and infrastructure. Each continent has its own key energy price benchmarks that should be monitored closely. Here’s how energy prices and their volatility differ across continents, and which benchmarks are most relevant:

1. North America

Energy Prices Used

In North America, particularly in the United States and Canada, natural gas, crude oil, and electricity are the most relevant energy prices for agricultural producers and buyers.

Volatility

• Natural Gas: The primary benchmark is the Henry Hub, which reflects natural gas prices at a major distribution hub in Louisiana. Prices are generally lower due to substantial domestic production, but they can spike due to extreme weather events like winter storms or hurricanes.
• Crude Oil: The key benchmarks are West Texas Intermediate (WTI) and Western Canadian Select (WCS) for the U.S. and Canada, respectively. These benchmarks impact agriculture mainly through transportation and fuel costs. WTI and WCS prices are exposed to global volatility driven by OPEC decisions, geopolitical tensions, and global demand shifts.
• Electricity: Regional electricity prices vary, especially where generation relies on natural gas-fired plants or renewables like wind and solar. Benchmarks like NYISO (New York), PJM (Mid-Atlantic), and ERCOT (Texas) are important for understanding regional electricity costs.

2. Europe

Energy Prices Used

Europe relies heavily on natural gas, electricity, and crude oil, with a diverse energy mix that includes renewables, nuclear, and imported fossil fuels.

Volatility

• Natural Gas: The main benchmarks are Title Transfer Facility (TTF) in the Netherlands and National Balancing Point (NBP) in the UK. These prices are highly volatile due to Europe’s dependency on imports from Russia, Norway, and LNG shipments. Geopolitical tensions, such as the Russia-Ukraine conflict, have caused significant price spikes.
• Electricity: European electricity prices are influenced by natural gas prices, renewable output, and regulatory changes like carbon pricing under the EU Emissions Trading System (ETS). The EEX Phelix (Germany) and Nord Pool (Nordic countries) are key benchmarks for understanding regional electricity costs.
• Crude Oil: The primary benchmark is Brent Crude, which, although not directly produced in Europe, affects transport and fuel costs crucial for agricultural logistics. Brent prices are sensitive to global supply-demand dynamics.

3. Asia

Energy Prices Used

In Asia, natural gas (particularly LNG), coal, and crude oil are the dominant energy sources impacting agricultural costs.

Volatility

• LNG (Liquefied Natural Gas): Japan Korea Marker (JKM) is the main benchmark for LNG prices in Asia, reflecting spot market prices for LNG deliveries to Japan and South Korea. JKM prices are volatile due to global demand fluctuations, supply chain issues, and competition for cargoes.
• Coal: Newcastle Coal (Australia) is the key benchmark for coal prices in the Asia-Pacific region, impacting costs in countries like China and India, which heavily depend on coal for electricity. Prices are volatile due to changes in mining output, environmental policies, and shifts towards cleaner energy sources.
• Crude Oil: Asia relies on imported crude oil, with Dubai/Oman benchmarks being most relevant for pricing Middle Eastern exports to Asia. These benchmarks are affected by global supply-demand dynamics and geopolitical factors.

4. Africa

Energy Prices Used

In Africa, the primary energy sources impacting agriculture are diesel (derived from crude oil), electricity, and, in some regions, coal. Renewable energy sources, such as solar and wind, are also increasingly significant.

Volatility

• Diesel and Crude Oil: The Brent Crude benchmark is most relevant for crude oil prices affecting diesel costs in Africa. Diesel prices are volatile due to global crude oil changes, local refining capacities, and currency fluctuations. High import dependency in several African countries exacerbates this volatility.
• Electricity: Electricity prices are influenced by grid instability and reliance on imported fuels. South African Power Pool (SAPP) prices are an important benchmark for Southern Africa. In countries investing in renewables, prices can also be influenced by weather conditions affecting solar and wind output.
• Coal: In countries like South Africa, coal remains significant for electricity generation. Richards Bay Coal is the primary benchmark for understanding coal prices and their impact on regional electricity costs.

5. South America

Energy Prices Used

In South America, key energy prices affecting agriculture include natural gas, diesel (crude oil), and electricity. The continent has a diverse energy mix, including significant hydroelectric power.

Volatility

• Natural Gas: Henry Hub and Argentina’s Plan Gas are relevant benchmarks. Natural gas is used extensively for electricity generation and industrial processes, and prices can be volatile due to changes in domestic production, imports, and regional political dynamics.
• Diesel and Crude Oil: The Brent Crude benchmark also impacts South American diesel prices, especially in Brazil and Argentina, where crude oil price fluctuations affect local markets.
• Electricity: Mercado Electrónico Mayorista (MEM) in Argentina and regional hydropower prices are significant for understanding electricity costs. Hydropower prices can be volatile due to weather patterns such as El Niño or La Niña, affecting water availability.

Conclusion

The impact of energy prices on agricultural commodities varies significantly across continents due to different energy dependencies, market dynamics, and infrastructure conditions. To effectively manage costs, mitigate risks, and maintain competitive operations in a global market, agricultural stakeholders need to monitor the relevant energy spot price benchmarks based on their location. Understanding these regional benchmarks and their associated volatilities can help develop tailored strategies for purchasing, production, and transportation.

Interchangeability Between Energy Types in the Agricultural Commodity Sector

In the agricultural commodity sector, energy prices significantly impact production, processing, and transportation costs. Understanding the interchangeability between different energy types—such as natural gas, crude oil, electricity, and coal—is crucial for agricultural producers and buyers. This interchangeability allows them to adapt to fluctuating energy prices and manage operational costs more effectively.

1. Natural Gas vs. Crude Oil (Diesel and Gasoline)

Natural gas and crude oil derivatives (like diesel and gasoline) are two of the most commonly used energy sources in agriculture. They power machinery, irrigation systems, and transport vehicles.

Substitution in Machinery and Equipment

Many agricultural operations can use either diesel (derived from crude oil) or natural gas to power their equipment. For example, grain dryers, which are critical in preserving harvested crops, can run on either propane (a natural gas derivative) or diesel. When diesel prices spike, switching to propane or natural gas can offer cost savings.

Transportation Flexibility

In transporting agricultural goods, diesel is the dominant fuel. However, some vehicles and machinery can be adapted to run on natural gas, particularly in regions with developed natural gas infrastructure. For instance, in the United States, an increasing number of farm vehicles and transport trucks are being converted to run on compressed natural gas (CNG) to take advantage of lower natural gas prices.

Example: Price Comparison Using Vesper

To better understand how agricultural stakeholders can navigate energy price fluctuations, consider the historical price comparison of Brent crude oil and LS (low-sulphur) gas oil on Vesper’s platform. The figure below illustrates the price trends for Brent crude oil and LS gas oil over the past decade.

As shown in the Vesper price comparison chart, there is a notable correlation between the prices of Brent crude oil and LS gas oil. During periods when Brent crude prices rise, LS gas oil prices typically follow suit due to their close relationship in the refining process and their use in similar applications, such as transportation and machinery operation. Conversely, when Brent crude prices decline, LS gas oil prices also tend to decrease, making both energy sources more affordable.

For agricultural producers, this price relationship is critical. When crude oil prices are high, the cost of diesel—an oil derivative used extensively in agricultural machinery and transportation—also increases. In such scenarios, switching to natural gas or its derivatives, such as propane, can help manage costs. The Vesper chart underscores the importance of monitoring both oil and gas prices, as shifts in one can directly affect the cost structure of agricultural operations.

2. Electricity vs. Diesel and Natural Gas

Electricity is essential for running equipment, irrigation systems, and storage facilities in agriculture. It is also increasingly used as an alternative to fossil fuels in agricultural machinery and processing operations.

Irrigation and Pumping Systems

Farmers can choose between electric pumps and diesel-powered pumps for irrigation. In regions where electricity prices are lower or more stable than diesel prices, electric pumps become more cost-effective. Conversely, in areas with unreliable electricity supply or high electricity costs, diesel pumps may be preferred.

Cold Storage and Processing

Cold storage facilities, vital for preserving perishable agricultural products, can run on electricity or, in some cases, diesel generators. During periods of high electricity prices or power outages, switching to diesel generators ensures continuous operation. However, in regions with access to cheaper or more reliable electricity, relying on the grid is more economical.

3. Coal vs. Natural Gas and Electricity

Coal remains a significant energy source in certain regions, especially for generating electricity and heating in agricultural processing.

Heating and Drying

In some agricultural sectors, particularly in developing countries, coal is still used for heating and crop drying due to its availability and cost-effectiveness. However, where natural gas or electricity is cheaper or more accessible, producers might switch to these alternatives. For example, natural gas is often used instead of coal in more developed regions for its cleaner-burning properties and lower environmental impact.

Electricity Generation

In regions where coal-fired power plants dominate electricity generation, the price of coal can indirectly affect electricity costs. If coal prices rise sharply, it can lead to higher electricity prices, prompting agricultural operations to consider alternatives like natural gas or renewable energy sources.

4. Renewable Energy (Solar and Wind) as Substitutes

Renewable energy sources, such as solar and wind, are becoming increasingly viable options for agricultural energy needs.

On-Farm Renewable Energy

Solar panels and wind turbines can provide electricity for on-farm use, reducing dependency on grid electricity or diesel generators. This shift is particularly advantageous in remote areas with limited access to the grid or where energy prices are high. For example, solar-powered irrigation systems are gaining popularity in sun-rich regions like parts of Africa and Australia.

Hybrid Systems

Many agricultural producers are adopting hybrid energy systems that combine renewables with traditional energy sources like diesel or natural gas. These systems provide greater flexibility and cost savings by allowing farmers to switch between energy types based on price fluctuations and availability.

Energy price volatility can drive decisions on which energy source to use in agricultural operations. For example, during periods of high oil prices, agricultural producers may shift to natural gas or electricity to reduce fuel costs. Conversely, if natural gas prices spike due to supply disruptions, as seen in Europe with the Russia-Ukraine conflict, agricultural operations might revert to oil-based fuels or coal, depending on availability and cost.