Why You Should Lock in Natural Gas Rates Now

Many natural gas customers experienced sticker shock this past winter as demand soared, driving prices to increase by as much as 2,000 percent in some areas of the country. In fact, the national price average was $7.78 per cubic feet in February of 2014 compared to $4.59 at the same time last year, according to the U.S. Energy Information Administration (EIA).

Now, with frigid temperatures behind us, prices remain about two-thirds higher than last year. This is being fueled by a combination of factors:

Lower storage levels

After the extreme cold caused a 10 percent increase in U.S. natural gas consumption compared to last year, the unprecedented demand caused natural gas inventories to drop to their lowest level in 11 years. This contributed to the highest natural gas spot prices in April since 2008. Even a record volume of injections this spring didn’t eliminate these storage deficits completely, according to the EIA.

More demand for exports

Regardless of the temperatures in the coming year, demand for natural gas will continue to rise. This is due to greater demand for exports. President Barack Obama has given the green light for an increase in natural gas exports by approving the $10 billion Freeport LNG Project, an import terminal that will be redeveloped into an export facility in Quintana Island, Texas.

There appears to be plenty of profit potential here.

Cheriere Energy, which received approval to export liquefied natural gas without free-trade agreements and expects to begin next year, has been growing rapidly. Its CEO was the highest-paid U.S. executive last year, making $142 million. Cheniere shares have increased 30-fold since November 2009 and performed more than five times better than the S&P 500 in the last 12 months. While the Obama Administration signaled the benefits of increasing natural gas exports outweigh potential downfalls, there is concern it could increase the domestic price of natural gas.

Accelerated retirement of coal and nuclear plants

As more coal and nuclear plants are retired, power plants are increasingly relying on natural gas. In fact, half of all power plant capacity additions in 2013 were from natural gas. Natural gas produced an added 6,861 MW of power last year, more than twice as much as the additions contributed by the next biggest driver, solar. The price of natural gas will increase as more is needed to power the electricity sector. Projections by the EIA show how much price change is likely to occur by the years 2025 and 2040 with the accelerated retirement of coal plants. According to the EIA, with accelerated coal and nuclear retirements, the average price for natural gas will increase from $3.44 per million Btu in 2012 to $5.92 per million Btu by 2025.

Lack of infrastructure

Although demand for natural gas is significantly higher than it was a decade ago, the country still lacks the pipeline structure to efficiently deliver and store it. New York, for instance, was forced to import it from refineries in the Gulf when demand rose this past winter. Natural gas is also expensive to store, which adds to price volatility.

Options for managing natural gas price volatility

Natural gas customers have no control over these factors, but they can limit their exposure to soaring prices with purchasing strategies that position them with better timing and less volatility.

One option is Constellation’s Managed Procurement Program, which provides a program price that is based on a mixture of fixed prices, cap prices and index pricing. This structured approach limits exposure to higher prices and maximizes the potential for lower prices. Customers can see how much gas they have each month and receive information on market changes.

Customers who want less day-to-day involvement in purchasing should consider the Minimize Volatile Pricing program, which uses a series of mathematical price targets to determine the timing of locking in purchases. This program can be used in conjunction with other price-locking or spot market strategies. It’s a good fit for customers who don’t already have flexible price-locking programs or who want to diversify their strategy.

Having choices means having more competitive prices and additional opportunities to save on natural gas costs.

To learn more about energy management strategies that minimize risk while maximizing budget certainty, contact us today.