For all but the most sophisticated customers who are trying to
determine whether the local utility or some alternative supplier
is offering a good deal on supplying natural gas, it is best to compare the offers directly rather than attempt to determine whether the offers are in line with expected gas prices.
Predicting natural gas prices, even for just a few years, has been
difficult for even seasoned professionals. This has been especially true the last few years which have seen very volatile gas prices. Most experts view the increased volatility as an effect of the swings in winter temperatures and increased summer demand for natural gas by gas-fired electric generating plants.
The federal government quit regulating the wellhead price of natural gas in the mid-1980's. Market forces (of supply and demand) now set natural gas prices. Prices often change direction for no apparent reason, often due to weather changes, the economy, hurricanes (which can temporarily affect gas production in the Gulf of Mexico), oil prices, and more recently, expected demand for gas-fired electric generation, which is highly dependent on actual or forecasted summer weather. Past price trends are often poor indicators of future prices.
Gas industry professionals rely on industry reports to get a handle on the market (such as Gas Daily, Inside FERC Gas Market Report, and Natural Gas Intelligence), government reports (from the Energy Information Administration of the US Department of Energy), and prices reported for gas futures that are traded on the New York Mercantile Exchange. Today's futures market gives one an idea of expected gas prices and price trends. This very volatile wholesale market is used by industry professionals such as utilities and other gas suppliers to price a portion of their gas, or to hedge current contracts with customers.
|Factors Affecting Supply Prices
- winter weather (heating)
- summer weather (electric generation)
- other fuel costs, use restrictions
- drilling rate
- finding, drilling technology
- producer finances
- pipeline capacity
- land use restrictions
The Energy Information Administration's Short Term Energy Outlook is a good publicly available source for an assessment of national natural gas price, supply, and demand for the short term.
Michigan's natural gas rates have historically been below the national average due to Michigan's abundant gas storage. This has allowed utilities and suppliers to buy about 50% of their winter requirements of gas in the summertime, when prices are usually reasonable, and store the gas for consumption in the winter months.
Almost two thirds of residential customer bills are due to the cost of gas supply delivered to Michigan utilities. The remainder of the bills include rates designed to recover distribution and customer related costs.The gas supply costs consist of gas costs at the wellhead plus pipeline transportation (and storage) costs to bring the gas to Michigan utilities. See also current rates, where the gas supply cost is billed as a GCR factor or gas cost (as part of Gas Customer Choice).
Gas industry professionals also rely on recent data from other sources to keep up-to-date. The Energy Information Administration reports detailed statistics on the natural gas industry in EIA Natural Gas Monthly, including production, demand, storage, imports, exports, and prices in the United States. Others, such as the American Gas Association, report more general statistics.
Because gas in underground storage is used to balance differences between supply and demand, the industry monitors available gas in underground storage via weekly surveys (see EIA's weekly natural gas storage report and EIA's natural gas weekly market update).
Because it takes time for supplies to respond to demand changes, prices tend to rise or fall while supply catches up with demand trends. Gas supply prices therefore tend to go in cycles. The changing factors, however make it difficult even for the experts to see any trends within this cycle to predict future prices. Historically, high prices have always led to increased supplies.
Industry organizations and associations also affect prices. The Federal Energy Regulatory Commission in Washington D.C. regulates the rates and services of interstate pipeline companies that bring gas to Michigan. The FERC-approved costs are included in utility gas supply charges. The North American Energy Standards Board sets standards, and various organizations set policies that affect their member gas companies, and therefore indirectly affect prices and services to Michigan.