F E D E R A L E N E R G Y R E G U L A T O R Y C O M M I S S I O N

High Natural Gas Prices: The Basics

“Given weather conditions this winter, supply overall appears to be adequate for U.S. needs through the winter, though prices could still spike on cold weather and local deliveries could be affected by local prices.”

Winter 2005-2006 Natural Gas Market Update January 19, 2006

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Natural gas prices have fallen Oil and Gas Prices ($/MMBtu) in recent weeks. 20

Natural gas prices rose significantly in 2005, trading Wholesale Gas for as much as $16.00 per MMBtu in national produc- (New York)

tion-area spot markets after hurricanes Rita and 15 Katrina. Since then, prices have fluctuated with Heating Oil (No. 2, New York) changing weather – lower during a warm November, $/MMBtu higher during cold weather in early December and lower again during mild weather through January. As 10 of January 23, prices were at $8.25 per MMBtu at the Residual Fuel Oil (No. 6, 0.3% Sulfur, Henry Hub, slightly higher in consuming areas of the New York) East and lower in the rest of the country. These prices 5 are much lower than peak prices in 2005, but still high 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1 1/1 by historical standards. Derived from Intercontinental Exchange.

Natural Gas Price ($/MMBtu) Production recovery in the Gulf of Mexico is strong. 20.00 Rita Recovery efforts in the Gulf of Mexico have returned

15.00 almost three-quarters of the supplies shut in by storm Katrina damage, both offshore and onshore, in Louisiana. Today, about 2.4 billion cubic feet (Bcf) remains shut- 10.00 in, 1.8 Bcf offshore and 0.6 Bcf onshore in Louisiana. Next Day Spot Price Combined with lower consumption because of weath- at Henry Hub, La. 5.00 er, this recovery has alleviated most of the immediate supply concerns for the winter of 2005-2006.

- 5/1/05 6/1/05 7/1/05 8/1/05 9/1/05 10/1/05 11/1/05 12/1/05 1/1/06 1/31/06 Shut-In Gulf Production (MMcf/day)

Derived from Intercontinental Exchange. 10,000 Katrina

Natural gas prices have fallen to the point where oil 8,000 Wilma prices appear to be holding them up. Except during Rita weather-driven periods, gas prices normally fall 6,000 Shut-in Louisiana between those for residual fuel oil (as a low) and heat- State Production ing oil (as a high). After the hurricanes, and again dur- 4,000 ing cold weather in December 2005, gas prices rose 2,000 Shut-In Offshore above that range. Recently, however, the gas price has Gulf Production

fallen near the bottom of that range and may not fall 0 much further at current oil prices. In New York, for 8/29 9/12 9/26 10/10 10/24 11/7 11/21 12/5 12/19 1/2 example, the gas price has not dropped far below resid- Derived from Minerals Management Service (MMS) and ual fuel oil for any significant length of time in years. the Louisiana Department of Natural Resources.

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The natural gas industry entered the winter with high What is the Commission doing to respond levels of gas storage, despite the supply interruptions to high gas prices? from the hurricanes. This was a sensible insurance policy against the possibility of a cold winter. As The Commission is acting to make sure that natural weather has remained warm in January, storage levels gas prices reflect the true balance between supply and demand, and not artificial constraints in the system have remained high (near the top of the five-year or the exercise of market power. It has: range). Withdrawals from storage have been relatively • Strengthened its enforcement policy, adopting low – consistent with warm weather and high prices. new market manipulation rules and implement- As a result, storage inventories are as high as they have ing its new civil penalty authority (up to been at this time of the year in any of the last five $1 million per day, per violation) in a manner years. to encourage a strong compliance program. • Improved its ability to detect new market manipulation by implementing a Memorandum of Understanding with the Storage Inventories 2000-2006 (Bcf) Commodity Futures Trading Commission.

3,500 • Established a strong monitoring system for the

3,000 market to make sure that the Commission detects any market manipulation that might 2,500 arise during this time of high prices. 2,000 • Issued orders immediately after the hurricanes

1,500 that let market participants move gas in new ways that avoided bottlenecks caused by the 1,000 hurricane damage.

500 5-year range 2004-05 2005-06 • Approved applications for a substantial 0 expansion of the Nation’s LNG terminals for Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar receipt of imported gas.

Derived from Energy Information Administration through • Shown a strong record of approving applications 1/20/06. for new pipelines in a swift and environmentally responsible way. • Approved changes to pipeline tariffs to help pipelines force compliance with operational flow orders to maintain system reliability. It is important to remember that the Commission does not directly regulate most wholesale natural gas prices, which were decontrolled in 1989 to prevent the severe inefficiencies and shortages of the 1970s from recurring. It has no jurisdiction over retail gas prices.

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Where are gas prices headed from here? How will imports affect the American market?

Before the hurricanes, natural gas prices had reached The United States produces 84 percent of the natural levels that reflected an ongoing tightness between gas it consumes. The United States imports the remain- supply and demand. Despite the warm weather this der from Canada and from overseas as liquefied natural winter, markets appear to expect natural gas prices gas (LNG). Canada is part of the same basic market to remain high in historical terms for some years with the United States and sees the same tightness to come. between demand and supply that we do. For overseas shipments, the United States competes with other con- Gas Forward Curve ($/MMBtu) suming countries in Europe and Asia. Even where spot

$12.50 markets are active (for example, in the United Kingdom), prices can be higher than in North America. $12.00 This winter, Europe has seen very cold weather and $11.50 much higher prices than the United States. As a result,

$11.00 where contracts permit, gas sellers have diverted LNG deliveries to Europe to take advantage of the high prices, $10.50 and deliveries to the United States have been lower than $10.00 last year.

$9.50 In the future, more natural gas producing countries will $9.00 be building plants to liquefy natural gas, increasing $8.50 overall supply. As a result, LNG is likely to be an Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 increasing part of natural gas supply in the United States. Derived from NYMEX data from 1/30/06.

In the near term, the best guess from the market is that What can you as a customer do about high prices will probably remain near current levels for the natural gas prices? next month or two and then trend higher through the summer as the electric power load picks up. The rela- You can cut your own natural gas bill through conservation – tively low price for the rest of this winter reflects high see (for example) the Department of Energy’s website gas storage inventories resulting from warm weather so http://energysavers.gov for practical suggestions on conser- far. Forward prices for next winter are 30 percent to 40 vation. When you conserve, you also help everyone else, percent higher than current prices. In future years, for- since reduced consumption lowers stress on the whole gas ward prices anticipate slightly lower prices each year, industry and tends to lower prices. with recurring peaks in the winter. Federal Energy Regulatory Commission These forward prices are not price predictions – only 888 First Street NE • Washington DC 20426 what the market is willing to trade at now for the For further information on natural gas: www.ferc.gov/industries/gas.asp future. In practice, weather will continue to be the most important factor in determining prices. A very If you have any questions please contact: hot summer or cold winter would tend to increase gas Office of External Affairs • 202-502-6088 1-866-208-3372 (toll free) • 202-502-8371 (TTY) prices, while mild weather would do the opposite. [email protected]

Disclaimer: This document reflects the views of the Commission staff and not necessarily the views of the Commission itself or any individual Commissioner.

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