Explaining Natural Gas Price Fluctuations
Posted November 21, 2018
Recent headlines on natural gas prices may leave Americans feeling whipsawed by marketplace fluctuations (see here and here). So, let’s look at what’s been going on with natural gas this year. But first, four points to keep in mind:
- Affordable natural gas has saved the average household more than $100 per year in recent years.
- Most consumers are typically insulated from wholesale price variations – the focus of recent news coverage.
- Price increases this month to date are mainly the result of lower inventories coupled with cold weather forecasts that, of course, can change suddenly.
- Recent price movements in natural gas futures are well within the ranges seen during the resurgence in U.S. energy production.
What’s the price of natural gas?
Natural gas prices to industrial users, who can buy gas directly from wholesale markets, track benchmark wholesale prices at Henry Hub. However, typical residential and commercial customers get natural gas from utilities or local distribution companies that have their own procurement and pricing strategies to protect consumers from price swings. Residential and commercial prices must additionally cover the costs to transport and deliver natural gas locally. Consequently, retail residential and commercial natural gas prices may not directly track daily variations in wholesale prices.
Was the recent increase in natural gas prices extraordinary?
No, the recent rise and fall in natural gas prices at Henry Hub are well within the historical range we’ve seen during the U.S. energy revolution. Memories about prices can tend to be short, however, and seeing natural gas prices go up in October and November has offered a different perspective compared with last year (charts: Bloomberg/EIA).
What spurred the recent increase in prices?
Two factors: First, natural gas inventories were at their lowest levels for October since 2010. The market appeared to be content with lower inventories since the U.S. energy resurgence has improved near-term deliverability of natural gas. That means increased production could meet the demand normally addressed with storage.
But second, a new expectation that winter may include a significant cold spell impacting natural gas supplies entered the picture. The National Weather Service’s tracking shows the number of heating degree days in early November was up from last year and over historical norms. The U.S. Energy Information Administration’s short-term energy outlook also now assumes heating degree days will be 4.5 percent higher in Q4 2018 compared with one year ago. The key word is “expectation.” A different forecast for winter could just as easily put downward pressure on prices.
Has natural gas saved American consumers money?
Absolutely! Short-term price fluctuations don’t change the fact that the overall affordability of natural gas has played a significant role in lowering household energy costs, increasing Americans’ disposable income.
In the Bureau of Labor Statistics’ latest consumer expenditure survey, which was for 2017, the average U.S. household spent $381 on natural gas and $1,420 on electricity for the year. For natural gas, this was the lowest level in more than a decade and at least $100 per year less than each year before 2010, when the U.S. energy revolution accelerated. Lower natural gas prices generally have helped to lower consumers’ electricity bills. Between 2014 and 2017, expenditures on electricity decreased by 4.3 percent or another $64 per year.
While we’re discussing household energy expenditures, let’s also mention average spending on motor fuels, which decreased by $500 or 20 percent compared with 2014. Household spending on energy, including all utilities, accounted for 6.4 percent of Americans’ total expenditures, which was the lowest percentage in more than a decade.
Price changes in commodities almost always attract public attention, but the context of total household spending really gives perspective on spending needs and priorities. While household energy costs fell in 2017, total household expenditures eclipsed $60,000 for the first time, an increase of $6,565 over 2014, reflecting solid income growth and consumer confidence.
Major factors in this increased spending included food (up $970), healthcare (up $638), entertainment (up $475) and other discretionary spending up ($2,981). Between 2014 and 2017, Americans’ spending on entertainment rose by more than the entire amount an average household spends annually on natural gas.
Now there’s a headline worth seeing.
About The Author
Dr. R. Dean Foreman is API’s chief economist, specializing in energy and global business. With a Ph.D. in economics from the University of Florida, he came to API from Saudi Aramco Strategy & Market Analysis in Dhahran, where he managed short-term market monitoring and the long-term oil demand outlook. Foreman has more than 20 years of industry experience in corporate strategic planning, forecasting, finance / risk management and regulatory policy at ExxonMobil, Talisman Energy and Sasol North America.
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