Natural gas prices still tumbling

September 23, 2006

Winter is just over the horizon, wholesale natural gas prices are falling faster than autumn leaves -- and a retail price war is in the making.

Friday's wholesale price of $4.64 per 1,000 cubic feet, or Mcf, was the lowest in more than two years. And gas marketers, who dominate sales in the territories served by Dominion East Ohio Gas Co., began dropping their retail fixed-rate contracts from the nosebleed $12 and $13 range to prices slightly more reflective of the wholesale markets.

But more rate cuts are likely, say the experts, meaning that if you are shopping for a fixed rate, you ought to keep shopping. Prices are falling in Columbia Gas of Ohio territories as well.

Dominion Retail, which does business in Ohio as Dominion East Ohio Energy Co., on Friday dropped its one-year contract price per Mcf from $11.27 to $10.97 in Dominion territory and from $1.20 per 100 cubic feet to $1.15 per ccf in Columbia territory. It has also signed a deal with the Northeast Ohio Public Energy Council, a government consortium, for $9.70 per Mcf through December and then $10.12 through next October in Dominion service areas.

But it may be too soon to lock in a long-term contract. The wholesale market fundamentals are "bearish," meaning prices are likely to continue falling for at least several weeks as winter storage levels rise, and even longer if mild weather persists into November as predicted. How low can they go?

Not much lower, says James Halloran, energy analyst with National City Private Client Group. Gas producers setting next year's budgets are already cutting back production because of the low prices. "Once you get signs that producers are not drilling as much, it's only a matter of time before prices begin going up," Halloran said

Still, the situation is a stark contrast to a year ago, when wholesale prices had reached $12.79 by this time.

At that point, they were on their way to an all-time high of $15.38 in December. Retail rates soared as well.

But a year ago hurricanes had destroyed gas production in the Gulf of Mexico, which accounts for a fifth of the nation's supplies, and weather forecasters were predicting a normal to colder-than-normal winter.

Here are the main factors that make this year different:

Hurricanes have not interrupted gas production in the Gulf of Mexico, and the chances of a storm smashing into production platforms or swamping the on-shore processing facilities are dimmer by the day.

El Niño is back. The National Climate Center, AccuWeather and other private forecasters say that an El Niño condition has unexpectedly set up over warm Pacific Ocean waters. That makes it likely that the jet stream will split in two, and the northern half of the nation is likely to see a warmer-than-normal winter, at least through December, said AccuWeather senior forecaster John Gresiak.

Natural gas in underground storage is already at nearly 3.2 trillion cubic feet, the Energy Department reported this week, higher than last year and well above the five-year average for mid-September. Storage levels may break records before winter begins, say some analysts, pushing prices down.

Oil prices, which tend to influence natural gas prices, have also been falling. Crude on Friday dropped $1.04 to $60.55 a barrel - after soaring past $78 in July. Many analysts expect the price to keep falling to the $50 range, and some say it could plunge to $40 as global economies slow down.

Hedge funds, which have driven up the price of future contracts for gas, have been hard hit by the sudden price drop and are leaving the market, selling tens of thousands of contracts - which depresses prices even more.

Dominion East Ohio Gas, with its auction earlier this month, has made its prices more transparent and may encourage greater competition. Dominion picked six suppliers for the utility and established how much the suppliers will be able to charge over the wholesale market price - a handling fee.

That fee will be $1.44 per Mcf for two years. Add $1.44 to the wholesale market price at the end of each month, and you get the variable rate. It will be called the Standard Service Offer, or SSO. It begins Oct. 12 and replaces the traditional gas recovery cost, or GCR.

The advent of the SSO has already prompted one independent marketer, WPS Energy, to come out with a lower handling fee of $1.32 for its variable rate, and as low as $1.22 for employees of companies who are members of the Council of Smaller Enterprises, or COSE.

"We think there are a lot of people who will want a variable rate," said Darrell Bragg, WPS vice president. "The $1.32 offer runs through October 2007, and there is no cancellation fee."

WPS is also offering a $10.20 fixed-rate contract through next October for those who want certainty. The prospect that many consumers, seeing the lower wholesale rates, will jump out of fixed-rate contracts and return to Dominion is debatable.

"It hasn't happened yet," said Dominion spokesman Neil Durbin.

"We recommend that customers check out their options in the Choice program and find a good deal," said Durbin. "A fixed price is not available under the SSO."

Signing a fixed-price contract this year may not make financial sense, said Kenneth Costello, senior economist with the National Regulatory Research Institute at Ohio State University. "I don't expect market prices to go up like they did last year," he said. "The marketers offering fixed-price contracts may think consumers don't know the situation."

Consumers are shopping for fixed rates - not running back to monthly variables, said Jeffrey Mayer, chief executive of MXenergy, which sells gas in 12 states and Ontario, Canada. "We don't see a lot of switching." To make sure, MXenergy on Friday lowered its one-year fixed rate by more than a dollar to $10.69 per Mcf.