Natural gas prices soar as cold grips homes, drillers
NEW YORK — 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 on Friday, up 10 percent to the highest level in 3 1⁄2 years. The price of natural gas is up 29 percent in two weeks, and it's 50 percent higher than last year at this time.
“It hit the magical $5 number,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova. “There's not enough supply and a lot of demand. It's not just cold in one market; it's brutally cold from Chicago heading east.”
Chicago was colder than the South Pole at the start of January as energy consumption rose and gas production sites reported disruptions because of freezing conditions.
Colder temperatures will grip most of the eastern United States and Canada through the start of February, according to forecasters.
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,” Schork said. “It's a dangerous market right now.”
Natural gas and electric customers are sure to be hit with somewhat higher rates in the months ahead. 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.
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.
Several factors are at play. In the past, much of the 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.
Now much of the production comes from onshore 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 pipelines are not being built fast enough to deliver all the gas required at times of high demand.
In some producing regions in Pennsylvania, gas was selling for below national benchmarks on Friday. But closer to East Coast cities it was selling for 10 times those benchmarks because producers could not get their gas into packed pipelines, according to Citibank energy analyst Anthony Yuen.
When the Calvert Cliffs Nuclear Station in Maryland shut down this week because of an electrical problem, 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.
Bloomberg News contributed.