Which way to burn;
Sign a contract for natural gas and lock in now? Hope for a mild winter and wait for the price to fall? If you have a contract, should you pay the penalty and get out? Here's what consumers need to keep an eye on as they decide...

Cleveland Plain Dealer
August 23, 2006
John Funk

Wholesale natural gas prices are headed for a dive, say most experts. But how long they will stay down - and whether consumers will see lower retail rates - is still a matter of debate.

A record amount of gas is already in underground storage for the winter, and the National Climate Center is predicting warmer-than-normal temperatures for much of the nation in October and November.

Storage capacity could easily be filled before November, say the analysts, creating a glut and sending wholesale prices tumbling amid weak demand for heating.

Hurricanes in the Gulf of Mexico could change that scenario - as the commodities market proved Tuesday with a 5.8 percent increase on news that tropical depressions off the coast of Africa were conducive to hurricane growth.

And a hotter than normal September, also likely according to federal weather forecasters, could sop up some of that gas glut if electricity utilities have to burn the expensive fuel to satisfy air conditioning demand.

But three things are certain at this point:

You shouldn't count on low winter heating bills just yet, but most industry experts think the rates will at least be lower than last year.

Independent gas marketers will soon be hustling to persuade you to lock in early to avoid midwinter price spikes, assuming winter sticks around this year.

A fixed contract could make a good insurance policy if the contract cancellation fee is $50 or less.

The start of stepped-up competition for your heating dollars began Tuesday with a new offer from WPS Energy:

Dominion East Ohio Gas Co. territory: $10.65 per 1,000 cubic feet from November through January.

Columbia Gas Co. of Ohio territory: $1.15 per 100 cubic feet from October through November.

Neither of those offers, nor any other from a marketer, includes local delivery charges (called transportation charges) from the utility. Dominion's rate is $2.34 per Mcf if you have been with a marketer for at least a year and $3.10 per Mcf if you are buying from a marketer for the first time. And don't forget sales taxes, which vary by county

Consumers who switch to WPS now will get the company's current quarterly rate of $7.99 per Mcf (for Dominion territory) or 88 cents per ccf (in Columbia's turf) for the rest of this quarter. Those prices are lower than what the utilities are charging. There is no cancellation fee.

Even with an autumn price dip, winter market prices will probably stay higher, said Darrell Bragg, WPS vice president, because of concern about weather in January and February.

Significantly, WPS is not currently offering a one-year fixed-price contract.

Rival marketer Interstate Gas Supply is offering that - at $11.29 per Mcf in Dominion territory and $1.18 per ccf on the Columbia system. But the cancellation fee is $150, making it unlikely many consumers will be able to dump IGS if market prices fall.

"I think my $11.29 is a good deal," said Vice President Doug Austin. "I would be very surprised to see us offer a lower price."

The reason?

Contract prices for this winter are still high on the New York Mercantile Exchange, where traders set the benchmarks for oil, gas, gasoline and other fuels.

For example, a marketer buying gas for delivery in January would pay $11.35 per million BTUs, equal to about 1 Mcf. That compares with just $7 for September gas. Add between $1.50 and $2 to those prices to roughly calculate retail rates here.

Austin thinks those winter prices will stay in the $10 to $11-plus range. "You will see an impact [decrease] in October and November," he said. "But I don't really think we will see a dramatic impact on winter prices."

But Robert Ineson, director of Cambridge Energy Research Associates' North American gas team, thinks winter market prices will fall - barring hurricanes or more-serious-than-usual geopolitical events.

"As we look at the market, we think the winter will be quite a bit softer than one would conclude simply by looking at the futures market," he said. "In our outlook, we are several dollars below where the futures market is."

That's not a certainty, said Matt Conlan, gas analyst with Weeden and Co., which serves institutional investors.

"I think gas prices will soften in the fall," he said, "but they have a chance to be very robust in the winter."

More than ever before, the weather is driving gas prices, because demand has grown significantly over the years while supply has remained relatively flat. Most of the new demand has been either for heating in the winter or electricity generation in the summer.

At least one supplier is again offering a three-year contract for consumers who don't want to spend so much time shopping. MXenergy will sell you a three-year fixed contract for $12.60 per Mcf (Dominion) or $1.26 per ccf (Columbia) with a $25 cancellation fee.

"Marketers feel a lot of competitive pressure," said President and Chief Executive Jeffrey Mayer. "We want to make our fixed price attractive to people."

Weather:
September through November, temperatures are expected to be warmer than normal, lowering demand for natural gas this fall and setting the stage for lower wholesale winter prices. A mild December would accelerate the price decline. But hurricanes ripping through the offshore wells in the Gulf of Mexico in the next 60 days would push prices north.

Supply:
Underground gas storage caverns and wells crucial to meeting winter demand were never emptied last year because of the mild winter. Now they are quickly filling up and many experts believe producers will run out of places to put gas before winter, leading to a glut and tumbling prices.

Demand:
Gas demand has steadily risen over the last decade, but supply has remained relatively flat. That has made prices volatile. Much of the new demand is for electric generation to meet summer air conditioning load and winter heating. Weather now drives prices.