By Myrna Trauntvein
Times-News Correspondent
QPC (Questar Pipeline Company)
Natural gas price hikes will be passed on to consumers
yet another year.
The advice to those purchasing the fuel, such as Nephi
City, might be: Attention, natural gas price shoppers hurry
and buckle your seat belts.
Nephi City Council members reviewed trends in wholesale
natural gas purchases and a forecast for retail rates for
the coming winter season at meeting on Tuesday.
"As you recall," said Randy McKnight, city administrator,
"we pre-purchased some gas last year and then, month by
month, we purchased gas to add tot hat."
Last year was a wild one in the natural gas market. It
proved to be a lot like following the stock market. The
prices went up or down at any given time. However, up is the
trend and that may be bad news for consumers during the
coming cold season.
Nephi City does have a contract with Wasatch Energy which
should help.
"We continue to follow the market closely but it isn't
looking really pleasant," McKnight said.
Prices spiked at the well, and that meant higher offers
to consumers.
Once the city, locks in a price with a supplier, any
supplier, gas choice prices are fixed for the length of that
contract. That may or may not be to the advantage of the
consumer.
"The prices this year are considerably higher than during
any single month last year," said McKnight. "The winter
season, as far as gas consumption is concerned, runs from
October through March."
Last year some of the gas was purchased on the spot
market which can force higher consumer prices but those
prices were still lower than today. If natural gas were to
be purchased in a three year strip the price would be,
currently, $6.887 to $7.75 per MMBtu.
Utility companies can change their rates every three
months.
Overview: Thursday, July 21 (next release 2:00 p.m.
on July 28)
Since Wednesday, July 13, changes to natural gas spot
prices were mixed, increasing at most market locations in
the Lower 48 States, while declining at most markets in the
Rocky Mountains, California, and Midwest regions.
For the week (Wednesday&endash;Wednesday), prices at the
Henry Hub declined 3 cents, to $7.75 per MMBtu. July 20, the
price of the NYMEX futures contract for August delivery at
the Henry Hub settled at $7.550 per MMBtu, declining about
35 cents or about 4 percent since Wednesday, July 13.
Natural gas in storage was 2,339 Bcf as of July 15, which
is about 10 percent above the 5-year average. The spot price
for West Texas Intermediate (WTI) crude oil decreased $3.27
per barrel, or about 5 percent, to $56.73 per barrel or
$9.78 per MMBtu.
Nephi City Council members had some basic questions as
the winter approaches: How much will natural gas cost and
will enough be available this winter heating season?
The answers to these questions ultimately depend on
ever-changing conditions in national and local markets for
natural gas. Since the summer of 2003, market conditions
have fostered an upward trend in natural gas prices. The
Energy Information Administration (EIA) expects that these
generally higher prices will continue through this
winter.
EIA estimates that the representative average residential
price of natural gas will be over 7 percent higher than last
winter, while consumption is projected to be almost 9
percent higher this winter. As a result, EIA expects that
the total amount spent for gas consumed by the
representative residential customer during this winter
(October-March) will be about 17 percent greater than last
winter.
"We asked for a prognostication for our city and were
told that we could expect a 10 to 15 percent increase over
last year's winter rate," said McKnight.
"The time when we could purchase gas for $2.07 per MMBtu
was a nice time in history," he said.
To understand the current high-price environment for
natural gas, it is helpful to know some basics about the
commodity itself and the marketplace.
Most of the natural gas used in the United States comes
from domestic gas production. The remainder comes from
imports, primarily from Canada.
Domestic gas production and imported gas are generally
more than enough to satisfy customer needs during the
summer, allowing a portion of supplies to be placed into
storage facilities for withdrawal in the winter, when the
additional requirements for space heating cause total demand
to exceed production and import capabilities.
Natural gas is injected into pipelines every day and
transported to millions of consumers all over the
country.
"Questar Pipeline Company for IT Storage Arbitrage
Indication is $6.615 for the Gas Daily Price," said
McKnight. "The stored gas price out is $6.915."
Natural gas is actually delivered to residential
customers, and other end-use consumers, through the complex
network of pipes owned and operated by local distribution
companies (LDCs) such as Questar.
The price of natural gas consists of three main parts
(all cost estimates include a number of taxes): Transmission
costs&emdash;to move the gas by pipeline from where it is
produced to the customer's local gas company; Distribution
costs&emdash;to bring the gas from the local gas company to
the house; and Commodity costs&emdash;the cost of the gas
itself.
Since the winter of 2002-2003, the cost of natural gas at
the wellhead has comprised 50 percent or more of the
residential price.
This has been the result of unusually high prices for
natural gas during winters, driven by similar market
conditions that included weak natural gas production
response despite increased drilling levels, colder than
normal weather for a number of consecutive weeks during each
heating season, declining net imports, and high crude oil
prices.
There are a number of underlying factors that have
affected prices. Depending on the factor, each has applied
either upward or downward pressure on prices.
These factors, among others, include: Weak
production&emdash;The industry in 2003 drilled the second
highest number of gas wells in a single year, however
production did not increase proportionally.
High Oil Prices - some large-volume customers (primarily
industrial consumers and electricity generators) can switch
between natural gas and other fuels, such as petroleum
products, depending on the prices of each. As a result of
this interrelation between fuel markets, when oil prices
rise, the competitive pressure to maintain low gas prices
diminishes, and the shift in demand to natural gas drives
prices upward.
Each year, EIA projects the average price, consumption,
and total cost of natural gas during the upcoming winter for
a household in the Midwest. (The Midwest is used because
nearly 66 percent of its 29.9 million households heat their
homes with natural gas&emdash;the highest concentration of
any region.) For the coming heating season, EIA estimates
that Midwest homeowners will pay about more per therm (1
therm=100,000 Btu, which is the heat content of about 100
cubic feet of gas).
Any forecast is uncertain, and changes to key factors
could alter the forecast significantly. Key factors that may
affect market prices and consumption regardless of region
include: A prolonged cold spell or even a brief episode of
severe winter weather; disruptions of the pipeline delivery
system; Problems in other energy supplies, such as a
prolonged outage of a coal-fired power plant could increase
use of gas-fired generators, thus increasing gas demand.
"The major demand factors are weather and economic
activity," said McKnight. "Due to the importance of the
weather factor, natural gas demand is highly seasonal."
Other forces affecting demand are population changes,
natural gas user trends, changes in legislation concerning
air pollution. Supply factors are transport availability and
accessibility as well as the physical amount of natural gas
being produced and the level of stocks.
Natural gas competes with other sources of energy such as
oil, electricity or coal. The natural gas price is
particularly pegged to that of oil, since oil is natural
gas' closest substitute and supply of oil and natural gas
are closely linked.
Like most commodities, natural gas prices are cyclical.
Their increase as a result of higher demand encourages
exploration and drilling (as it happened in 2000). Although
it takes some time for the production industry to respond to
a price signal, once production increases prices tend to
fall. However, market fundamentals indicate that in the
future natural gas prices may not fall to the low levels of
the past years.
"The council authorized our buyer to work for the best
possible wholesale rates for this coming winter," said
McKnight.
The forecast for retail rates is that they will not
drop.
The Office of Technical and Regulatory Analysis' (OTRA)
assessment of wholesale natural gas supply and prices for
June indicated that world oil prices continue to be the
major driver of natural gas prices and natural gas prices
are once again rising in sympathy with world oil prices,
causing current wholesale natural gas prices for June to
rise back up to the $6.60-6.80 per million Btu's (mmBtu or
approximate dekatherm) plus range, which is higher than last
month and higher than the market of one year ago.
These price levels ($6 plus) may well strengthen later in
the year, so that the price forecast for next winter is
still among the highest ever seen ($8.37/mmBtu) at this time
of the year, as suggested by the current futures' contract
prices of the New York Mercantile Exchange (NYMEX).
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