Natural Gas Pricing Update for Summer 2013
Apart from supplying natural gas liquids to the manufacturing industry and fuel for heat in the winter, natural gas continues to be used as a fuel stock to replace coal in newer power generating plants. Because it can’t be stockpiled like coal at power plants and is supplied through pipelines, natural gas’s price volatility is a major factor not only for electricity generators but for power grid managers as well. When summer heat settles in, electricity demand for air conditioning begins draining the supply of natural gas.
Demand’s Big Chill
Summer heat levels throughout Texas and the northeast drove up electricity demand because people love their air conditioners. More natural gas generators were spinning up to meet that demand, which in turn sent natural gas prices well beyond $4/MMBtu, more than 20% over last year’s prices. Though not as expensive as years past, Jake Dyer, spokesman for the Texas Coalition for Affordable Power, told the Dallas News, “We’re in the middle of summer, so people are going to be looking at some fairly painful electric bills.”
Yet just went it looked like everyone’s electric rates were climbing because of the heat, the Jet Stream dipped southward to form a cool pocket over the east coast and central plains states. In some of those regions, the mercury didn’t even reach the 80s for a week, letting consumers turn off their air conditioners and open their windows. The EIA reports, “With cooler-than-normal weather across most of the country this week, natural gas spot prices at most trading locations fell more than $0.20 per million British thermal unit (MMBtu) since last week (Wednesday, July 24, to Wednesday, July 31).”
Moreover, there are signs that long stretches of summer heat in the northeast might be done. Accuweather forecasts that, “The jet stream will continue to push wave after wave of cool air from the northern Plains to the Midwest, New England, and mid-Atlantic through the middle of August.”
Low electricity demand will likely continue to offset slight increases in natural gas power burn in Texas and the Southwest in an attempt to support the increased air conditioning load. In Texas, temperatures in the upper 90’s and 100’s look to persist deep into August. So will those high cooling costs, the NOAA predicts warmer than average temps in the west and southwest.
According to the Energy Information Agency (EIA), natural gas production levels are still high (see above graphic), in spite of lower rig counts. On December 14, 2012, there were 416 rigs. The latest information reported by Baker Hughes Incorporated totaled 369 active rigs (July 26). (Interesting note: the oil rig count increased by 6 units to 1,401 rotary rigs. US crude oil production is now up to 7.5 million bbls/day —the highest output in one month since 1991.) The recent net injection of natural gas into storage was larger than market expectations, which on average were reported to be 56 Bcf, which is over the 41 Bcf from the previous week, due to widespread warm weather.
Working natural gas in storage increased to 2,845 Bcf, which is 11.5% less than last year at this time, but only 1.2% below the 5-average (which includes the glut year of 2012). Liquefied natural gas (LNG) imports are also falling since the US is widely anticipated to become a net exporter.
If ERCOT (the state entity that oversees the Texas grid and electricity market) was asked, “How would you describe your current relationship with natural gas?” it would answer, “It’s complicated”.
Logically thinking, cheap natural gas should reduce electricity prices in Texas. The problem is that in the ERCOT area, generator companies are reluctant to build plants. They argue electric rates are too low to justify the investment and part of that problem comes from low fuel prices like natural gas.
ERCOT, meantime, needs to have more generators built in the state (ERCOT is a sort of electric “walled garden”) to raise its capacity to reliably meet electrical demand. With US Census data showing that 1,200 people move into the state each day, that adds up to some serious electrical load.
Thus, Texas languishes on the “longhorns” of a dilemma: Texas needs cheap electricity to spur growth and investment, while needing consistently higher natural gas to attract electricity companies to build electric generation plants.
ERCOT has not been idle, of course. A new proposal to revamp its investment allure to generators is slated for discussion this September. The plan looks at switching from paying generators for the electricity they sell to consumers (called energy-only) to one that would pay generators according to their ability to supply electricity (called “capacity market”). Capacity markets are operated in New York, New England, and the PJM Interconnect.
Short Term Outlook
In the meantime, not only is there no relief from the heat for Texas, but the natural gas prices have fallen lower. EIA says that the NYMEX price of the September 2013 contract fell $0.25 cents, from $3.698 per MMBtu on July 24 to $3.446 on July 31. (NOTE: as of this writing on August 7 @ 11.39 am EST, the NYMEX price was down to $3.26 MMBtu for the September contract price).
EIA’s Short Term Energy Outlook since the beginning of the year has varied only by a few pennies. The last STEO, August 6, 2013, provides expectations that the Henry Hub natural gas spot price will average $3.71 per MMBtu in 2013 and $3.95 per MMBtu in 2014.
Part of this prediction stems from long range forecasts for November through January. NOAA is suggesting (five months from now) that above-average temperatures might be more widespread than 2012-2013. A warm winter would continue to keep both natural gas prices low (good news for northern climes) and possibly contribute to lower electricity prices in Texas where most home heating relies on electricity (bad news for ERCOT’s reliability needs).
The advice for consumers depends on where they live. If you live in the northeast, chances are good that you might want to switch to a long term plan with your electric provider in the next month or two, but keep an eye on the weather. You’ll want to switch before the winter heating season begins. If you live in Texas, it’s a little bit … um … complicated. While there’s good reason to switch to a multi-year plan in the next two or three months, it might be worth waiting until Spring 2014, depending on ERCOT’s reaction to the new market proposal.
Remember, it always pays to cut your summer cooling costs by setting your thermostat higher when you’re away, doing laundry during off-peak hours, and using fans to help circulate the air in your home. For more cool ideas, check out our energy efficiency tips.