Thursday, November 06, 2008

Natural Gas Prices Fall 80% To a 6.5 Year Low

Update: Top chart has been added, showing a -55% decline in futures prices for natural gas between early July and late October.
With all of the attention recently on falling oil and gasoline prices, there hasn't been much attention on falling natural gas prices, which recently fell to levels not seen since early March of 2002, more than 6.5 years ago! Since the most recent peak in late June, natural gas prices (wellhead price for West Texas gas) have fallen by almost 80% (see bottom chart above). Prices for futures contracts on natural gas have fallen by 55% between July and late October (prices have moved up in the last week).

Bottom Line: Because of the significant decline in natural gas prices, we can expect lower electricity prices, and lower home heating costs this winter, and in fact it's already happening. From a USA Today story:

Here's a bright spot in an ailing economy: Electricity prices are falling in many areas.

The sharp drop in natural gas prices and, to a lesser extent, oil prices is slashing electric rates across big swaths of the USA. Utilities in the Northeast, Texas, Florida, the Mid-Atlantic and California rely heavily on natural-gas-fired power plants to generate electricity.

Natural gas prices have plummeted as the anemic economy has dampened consumption. Also, natural gas resources jumped this year as producers found ways to unearth fresh supplies embedded in shale rock.

Update 1: The prices in the chart are for "Natural Gas Wellhead Price West Texas (US$/MCF)" from Global Financial Data (paid subscription required). In the interest of space, I left off "West Texas" from the title of the original graph for this post, but have now added it in response to the first comment.

Update 2: In an email, an energy economist writes "Starting in April of this year, utilities were filling their storage fields and reservoirs with high-priced gas in order to have plenty of supplies on hand for winter demand. Consumers will be charged the price the utilities paid for the gas when they put it in storage earlier this year. I fear you may be giving residential natural gas users false hope by implying they will be paying lower prices for their gas this winter. It's more likely that they'll pay more than they did last winter."


At 11/06/2008 7:53 PM, Anonymous Anonymous said...

That data is just plain bad. Don't use wellhead data because it never specifies WHICH wellhead. Use data at some hub, like the henry hub or AECO hub, where the gas prices are pretty high still. I guarantee you the utilities don't buy from the wellhead.

At 11/06/2008 9:29 PM, Blogger Mark J. Perry said...

Anonymous: Please see my updated post, and please forgive me for not putting "West Texas" in the title of the graph. I didn't think anybody would care, but I was mistaken.

At 11/06/2008 10:43 PM, Anonymous Anonymous said...

"Natural Gas Prices Fall 80% To a 6.5 Year Low"

That's odd, we just got a huge natural gas rate hike.

At 11/07/2008 7:01 AM, Anonymous Anonymous said...

I've got to agree with anonymous.

No one cares about wellhead prices, especially not in West Texas.

You'll find at bloomberg the most recent Henry Hub spot price, which was $7.02 yesterday.

At 11/07/2008 9:56 AM, Anonymous Anonymous said...

Henry Hub is probably the best reference price to use, particularly for the Eastern half of the US. Still, Henry Hub prices are down about 50% from their summer highs.

As an aside, $7.02 is the price per mmBtu which is about $6.80 per mcf.


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