A few years ago, natural gas wholesale prices were closely tied to the Gulf Coast, where a large number of production facilities are located. Any hurricane or other storm in the region could cause prices to spike, sometimes exponentially.
That’s not the case anymore, industry experts say.
“While it used to be we were very concerned about hurricanes going through the Gulf, while it would still have an impact on prices, it is not nearly what it would have been,” said Jeff Murphy, Dominion East Ohio managing director for commercial operations, who also oversees the regulated utilities’ Customer Choice Program.
The industry has diversified supply sources. In particular, there’s a lot of drilling for natural gas from Marcellus shale formations in eastern Ohio, Pennsylvania and West Virginia. There are also possibilities for what is called Utica shale in parts of Ohio. There’s also the Rockies Express Pipeline, which is bringing natural gas to Ohio from the Rocky Mountains, said Bruce Hayes, principal regulatory analyst with the Ohio Consumers’ Counsel, the state’s residential utility advocate.
“Prices are low and stable and have been for a while,” Hayes said. “I don’t see much that could move prices currently from where they are.”
Increased production has led to increased storage, even with a slight increase in demand. It has kept prices on the New York Mercantile Exchange (NYMEX) low, Murphy said.
“All of that has reduced the volatility of gas prices and brought those risks down. The risks are still there, but much more muted,” he said.
Cold winter temperatures could still have an impact on pricing, Hayes said.
Gas storage, while not at last year’s all-time high, is still considered high, so that should also help with pricing, Murphy said.
Hayes said if he looks at what he calls “Black Swan event” possibilities that could raise prices, they would include a massive pipeline failure; an extremely cold winter (as in a one-in-100-years cold winter, not the typical Northeast Ohio cold) or a physical problem at one of Dominion’s wells. But Hayes said the likelihood of any of those is slim.
The most recent Short-Term Energy Outlook report from the U.S. Energy Information Administration also points to prices remaining low for the next year. The outlook shows a slight increase in wholesale prices in 2012, but says “though the 2012 average reflects some tightening in supply as domestic production growth slows, prices have remained relatively low over the past few years as a result of abundant production.”
Futures prices on the NYMEX change multiple times a day, but were averaging in the high $3/mcf to $4.50/mcf range last week. While Dominion, the regulated utility, does not buy and sell gas anymore, it does randomly assign customers who don’t choose their own provider to its rates, the Standard Service Offer (SSO) and Standard Choice Offer (SCO), which are determined by a state-approved formula set by an auction of marketers each March. That “adder” until March of 2012 is $1/mcf above the NYMEX settlement price of the previous month.
That $1/mcf “adder” has come down in the last few auctions, from $1.40/mcf to $1.20/mcf to its current $1/mcf and indicates what is called a “price-to-beat” for competitive marketers for their own monthly variable rates and fixed rates, said Ohio Consumers’ Counsel Janine Migden-Ostrander.
While Migden-Ostrander said her agency has been pleased with the wholesale market auctions, it agency has heard that marketers might be considering options to move away from the wholesale auction and go strictly to retail marketing. That would result in higher rates for consumers and less transparency because there would be no price to beat, she said.
Murphy and Hayes both said based on the history of the market, where the NYMEX futures are trading for the next year and the lower risks now associated with the pricing of gas, they personally will strongly consider monthly variable contracts for their own homes this winter. Murphy said in years past, he has usually locked in a fixed price, but this might be the year he sticks with the SCO.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com. Follow Betty on Twitter at http://www.twitter.com/blinfisher.
