NEW YORK (AP) — The frigid winter of 2014 is setting the price of natural gas on fire.
The
price in the futures market soared to $5.18 per 1,000 cubic feet
Friday, up 10 percent to the highest level in three and a half years.
The price of natural gas is up 29 percent in two weeks, and is 50
percent higher than last year at this time.
Record amounts of
natural gas are being burned for heat and electricity. Meanwhile, it’s
so cold that drillers are struggling to produce enough to keep up with
the high demand. So much natural gas is coming out of storage that the
Energy Department says supplies have fallen 20 percent below a year ago —
and that was before this latest cold spell.
"We’ve got record
demand, record withdrawals from storage, and short-term production is
threatened," says energy analyst Stephen Schork. "It’s a dangerous
market right now."
Natural gas and electric customers are sure to
see somewhat higher rates in the coming months. But they will be
insulated from sharp increases because regulators often force natural
gas and electric utilities to use financial instruments and fuel-buying
strategies that protect residential customers from high volatility.
To
understand the price increase, just look at the thermometer. A second
major cold snap this month is gripping much of the country, including
the heavily-populated Northeast. And forecasters are now predicting
colder weather in the weeks to come, extending south through Texas.
Natural
gas is used by half the nation’s households for heating, making it the
most important heating fuel. Electricity is the second most popular
heating source, and electric power generators use natural gas to
generate power more than any other fuel except for coal.
Commodity
Weather Group, which predicts heating demand for energy companies and
consumers, said in a report Friday that periodic breaks in the cold
weather are expected to be "weaker and briefer, extending the duration
of colder weather" in late January and early February.
There are a
couple of other factors at play. In the past, much of U.S. natural gas
was produced in the Gulf of Mexico. If weather disrupted supplies there,
it was typically in the early fall, during hurricane season, when
heating and electricity demand are low and natural gas storage
facilities are mostly full in preparation for winter.
Now, much of
U.S. production comes from on-shore formations that are more
susceptible to cold, ice and snow. Wells that are not designed for such
extreme conditions can freeze, halting production.
"Now the threat to production is when demand is at its highest," Schork says.
Also,
electric utilities have for several years been switching to cheaper
natural gas for power generation. And new pipelines aren’t being built
fast enough to deliver all the gas required at times of high demand.
That can lead to regional shortages that send prices skyrocketing.
In
some producing regions in Pennsylvania gas was selling for below
national benchmarks Friday, But closer to East Coast cities it was
selling for 10 times those benchmarks because producers couldn’t get
their gas into packed pipelines, according to Citibank energy analyst
Anthony Yuen.
When the Calvert Cliffs Nuclear Station in Maryland
shut down earlier this week because of an electrical problem brought on
by snow and ice, power generators across the East Coast scrambled to
replace the lost power by cranking up natural gas-fired plants. That
sent natural gas prices for immediate delivery, known as the spot price,
to a record $120 per 1,000 cubic feet in some markets on the East
Coast. To put that in perspective, that’s equivalent to oil at more than
$700 per barrel.
Analysts say there is plenty of gas to replenish
supplies, and drillers will likely ramp up production so they can fetch
prices they haven’t seen since June of 2010.
That could push
prices back down somewhat in the coming weeks. If, that is, the weather
warms up later in February and March. If it’s still cold when baseball
season opens in early April, though, Schork says, "we’ll be looking at
much higher natural gas prices."
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Jonathan Fahey can be reached at http://twitter.com/JonathanFahey.
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