Natural gas futures at 2-year low

| Friday, Jan. 13, 2012

A drop in natural gas prices for February does not mean next month's bill will be lower.

But the two-year low in futures prices for the fuel could trim consumer bills slightly when utilities adjust rates in April. Industrial companies such as steel and chemicals that use huge quantities of natural gas as a fuel and raw material will benefit as well. And despite a market glut, don't expect natural gas producers to slow their output, experts said on Thursday.

"We have a combination of continued strong drilling and unusually warm temperatures that is really causing the stockpile to continue to go up," said energy expert Kent Moors of Duquesne University.

Demand will rise as more natural gas is used to generate electricity, make chemicals and fuel vehicles, and as it's shipped overseas in liquid form. But "in the short term, you're between a rock and a hard place if you're a driller. The normal drain-off isn't there," Moors said.

Natural gas for February delivery fell by 7.7 cents to $2.697 per million British thermal units yesterday after a weekly Energy Department report showed a below-average decline in stored fuel.

Stockpiles have been above a 5-year average since late September. That's due in part to furnaces being turned down in mild weather, but other factors are a "huge amount of new production" from Marcellus shale wells and other resources nationwide, plus more storage facilities, said Jon Skoog, vice president of gas supply for Peoples Natural Gas Co.

And local production impacts local prices. On the Gulf Coast, market prices typically have run 30 to 50 cents lower than those in Western Pennsylvania, Skoog said. But the New York Mercantile Exchange price yesterday for gas at Louisiana's Henry Hub was $2.81; the Dominion Transmission Appalachian Index price, applicable for the Pittsburgh area, was 2 cents lower, he said.

"Natural gas prices should remain very reasonable across Pennsylvania," said state Consumer Advocate Sonny Popowsky.

"The way the natural gas price works in Pennsylvania, utilities buy at wholesale and then sell at retail -- for the same price. Every three months they update their rates to reflect the change, and prices have been going down since the summer of 2008.

"They were $14 or $15 then. Now they're below $3." More than half of the state's households are heated with natural gas, Popowsky said.

Consol Energy Inc. can scale production levels in its Marcellus and Utica shale regions as market prices rise and fall, spokeswoman Lynn Seay said. Natural gas historically has been the most volatile commodity traded on the Nymex, she said.

Cecil-based Consol also plans 42 percent of its drilling this year in more profitable liquid-rich gas regions, Seay said. Developing Asian countries are expected to increase their liquid natural gas consumption by 240 percent by 2035, she said, adding gas will increase in use as a chemical building block for plastics and paint and as a transportation fuel.

Demand also could rise with construction of new power plants. By 2020, Moors said, 30 to 60 gigawatts of U.S. electric generation capability is projected to go offline because of age. "Most is coal-fired and will be replaced by natural gas," he said.

FirstEnergy Corp. spokesman Doug Colafella said low prices are prompting more talk in the power generation industry about building natural gas-fired plants, although power demand has been low with the lingering recession.

The Akron-based owner of West Penn Power and Penn Power has 11 plants that run on natural gas or oil. Some are small, and they are used primarily as "peaking" plants to run when demand is high, such as on hot summer days.

FirstEnergy's "base load" plants that run every day primarily are coal- or nuclear-fueled, Colafella said.

Coal is more stable in price than natural gas, he added, although Seay said low gas prices and "the Obama administration's disdain for the coal industry makes it more likely that gas will be the preferred fuel for new power plant construction."

With big stockpiles, midstream companies that own underground gas storage and pipelines "ought to be making money now," Moors said. Still, strong production should continue.

Additional Information:

Natural gas outlook

No sustained deep freeze that might raise natural gas use is in the weather forecast for the foreseeable future.

While temperatures will fall below normal this weekend, next week will be average for January with highs in the mid-30s and lows in the low 20s, said meteorologist Brad Rehak of the National Weather Service.

The following week should bring back above-normal temperatures, he said.

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