Due to a colder than expected early winter that has increased demand and caused a decline in the amount of natural gas storage in the U.S., natural gas prices have zoomed to a 19-month high.
In December prices were averaging around $4 per 1,000 cubic feet of gas. In early January natural gas was trading on the New York Mercantile Exchange as high as $5.15 per 1,000 cubic feet of gas.
“There are a couple of reasons why prices are increasing,” said Doug Palmer, industrial sales manager, Centerpoint Energy Entex, which has 120,000 customers in the Gulf Coast, Central Mississippi and Oxford areas. “The weather has been cooler than the norm not only throughout the Southeast, but also the rest of the country. And oil prices are extremely inflated. Right now they are over $30 per barrel. A lot of the gas is competitive with fuel oil. As fuel oil prices rise, producers increase their gas prices. Then the future traders are driving the market up in the short term. January through April contracts are being bought up in an accelerated amount by people trying to make profits on the trading side, whereas three months ago there wasn’t a lot of activity.”
Palmer said that most consumers of natural gas should see only a small increase. The biggest effect will probably be on large industrial users since large industrial customers usually buy natural gas on a monthly spot basis.
“They actually pay the hike immediately whereas the residential and small commercial customers are on our system- wide gas costs, and that is bought in larger packages for three-, six- and 12-month periods of time,” Palmer said. “So that lowers the impact to them considerably. It makes the rises and dips more tolerable for the smaller customer and it evens it out a little, whereas the industrials buy on a monthly basis. Every time natural gas prices rise, they pay that increase.”
Industrial customers had forecast a 2% to 5% increase in price. But now it looks more like a 5% to 10% increase from the early part of the year through May.
“What really makes it bad is the rise in the pricing is more than they had projected for their budget,” Palmer said. “Thus it is coming off their bottom line immediately.”
These increases come at a bad time since manufacturers have been in a recession sparked in part, according to the National Association of Manufacturers (MMA), by the natural gas price spike of several years ago.
“Prices are not to the levels they were in 2000-2001, but the rising costs impact manufacturers differently,” said Mark Leggett, senior director of government affairs for the Mississippi Manufacturers Association. “Most manufacturers will pay higher prices for gas and then later see higher electricity prices as the utilities pass those natural gas costs along. Some manufacturers have purchased gas contracts that provide them some price stability, but others are subject to market fluctuations.”
The forecast right now is that after June prices should be back to the norm. But all bets are off if the U.S. goes to war with Iraq, which could cause an increase in oil prices. Increases in oil prices usually cause natural gas prices to go up, as well.
Electricity prices in the state could also be affected in cases where utilities are using natural gas to generate electricity. But the effect is moderated with utilities that have other fuel sources to generate electricity
“Entergy generates electricity from a diverse mix of fuels, everything from natural gas to nuclear, to hydro and coal, and even wind power,” said Robert Lesley, spokesperson for Entergy Mississippi. “Why that is important is that winter is a time of the year with low electricity usage. Having a diverse mix of fuels to generate electricity gives us more flexibility about how we meet our demand. Right now we are focusing on sources of electricity that don’t use natural gas.”
At this time Entergy doesn’t anticipate that the current price of natural gas will have a significant impact to their customers. Leslie said the company will continue to monitor the situation and make any adjustments needed to keep their costs as low as possible.
Predicting the future price of natural gas is difficult because there is a very tenuous balance between available supply and the demand for natural gas in the U.S., says Joseph Sims, president, U.S. Oil and Gas Association in Mississippi and Alabama.
“We have increasing demand and a domestic circumstance where the entire system — natural gas production, pipelines and distribution — are at capacity,” Sims said. “If you have an unusually cold January, more storage is withdrawn, the system is taxed, and you can’t just suddenly produce more natural gas. You just have to hope daily production and daily deliverability is sufficient.”
The Energy Information Administration reported in early January that storage was down 162 billion cubic feet to about 2.8 trillion cubic feet. That was about 14% lower than a year ago. That news was credited for causing the spike in natural gas prices.
Sims said the good news is that more rigs are actively drilling for natural gas than for oil. But if you compare natural gas production for past 12 months, it may be down slightly from a year ago.
“So we need to take a long-term view to insure that we’ll have natural gas to meet the demand,” Sims said.
Sims said higher prices help the economics for drilling for natural gas in the state.
“It may open up new opportunities for deeper gas,” Sims said. “More natural gas production has an economic benefit to the counties and the state through severance tax revenues. We also have in this state substantial electricity generated by natural gas, which is a very cost efficient manner of producing electricity. So if you look at Mississippi, we use it, produce it, transport it and use it for electricity generation. Natural gas is very important to the state’s economy.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org</a.