Natural gas is getting pricier, and so could heating bills
Consumers could feel the pinch this winter with cold weather ahead and low stockpiles
Investors are bracing for continued gains in natural-gas prices this winter—a development that could pinch U.S. consumers who use the fuel for home heating.
A sudden change in weather forecasts has pushed natural-gas futures to four-year highs this week. On Wednesday, prices rallied 17% to $4.80 (U.S.) per million British thermal units, and traded at their highest intraday levels since February 2014.
The rapid surge has rattled investors and traders, as the market goes into the winter heating season with less supplies in storage than any other year since 2005. Natural-gas prices have climbed more than 50% this yearwith most of that happening since last month- while crude oil has fallen more than 20% from its October peak.
“The market has given us a glimpse of just how volatile it will be,” said James Stewart, vice president at Beeson & Associates, which specializes in commodity risk management.
Traders largely expected record-high levels of natural-gas production would replenish
stores for winter. However, demand has climbed outside of weather-related catalysts, going toward rising exports and as a substitute for other energy sources like coal.
“There’s a more structural base to the demand equation than others think,” said Kyle Cooper, a consultant at ION Energy Group in Houston.
That should lead to higher heating bills this winter, particularly if temperatures are colder than predicted. The U.S. Energy Information Administration expects natural-gas heating bills
to rise by 5% compared with last year on higher prices. If the winter is 10% colder than forecasts, the government agency predicts that natural-gas costs will rise by 16%.
Last winter, a severe storm drove natural-gas futures above $3/mmBtu. The Northeast, which lacks the pipelines needed to move natural gas, experienced even sharper price swings, with regional prices surging as high as $175/mmBtu.
“The cold to this extent was not really on anyone’s radar. Now forecasters are scrambling,” said Jacob Meisel, chief weather analyst at Bespoke Weather Services.
Hedge funds and other speculators are more bullish than ever. Net bullish bets on naturalgas prices recently reached a record high in data going back to 2006, according to the Commodity Futures Trading Commission.
“The last several years’ production has been very robust, and demand has been very weak. We’re seeing a reversion of that,” said Darwei Kung, portfolio manager at the $3.1 billion DWS Enhanced Commodity Strategy Fund.
Mr. Kung said the firm is betting on more volatility over the next few months but expects prices to ease after March.
A revision of weather expectations could reverse the recent rally if heating demand fails to materialize. This winter is a blip on an otherwise bearish outlook that assumes the U.S. will be amply supplied over the next few years.
The EIA expects dry naturalgas production to average a record 83.2 billion cubic feet a day in 2018, and climb to another high of 89.6 billion cubic feet a day next year.
The companies producing more natural gas are so far reaping the rewards of the bull market. Cabot Oil & Gas Corp. shares rose 13% in one month and Southwestern Energy Co. rose 9%, as many other energy names have suffered from a severe drop in oil prices.
However, drilling is also susceptible to freeze-offs during the winter, which can disrupt production at a time of increased demand. This could have greater consequences this year, analysts said, as the U.S. produces more natural gas than ever.
“Not only are we more dependent on those areas…if we assume the proportionate amount of freeze offs, you would actually lose more supply,” said Nina Fahy, head of North American natural gas at Energy Aspects.
Total natural-gas demand in the first half of 2018 increased by 12% compared with a year earlier. Exports have also doubled on average this year compared with 2017, according to the EIA.
“We’re seeing record gas consumption in the power sector this year on average,” said Richard Redash, head of North American gas and power research at S&P Global Platts. “That has been a key factor in why the market is so much bigger than it was.”