Slide 24 of 25
- Natural gas prices surged as summer began. While increasing crude oil prices may have helped to move natural gas prices higher through March and April, the latest May surge seems to have come from a confluence of factors raising concerns over the ability of supply to meet the peak summer demand days this year. The concerns center on:
- A hot summer being expected this year;
- A larger share of power generation using natural gas -- especially with the addition of some new merchant power plants expected to be in service this June;
- A possible interruption to supply from the hurricane season;
- Overall demand growth eating into excess deliverability;
- Natural gas inventories lower than last year, and, while not at record absolute lows, providing less coverage as measured in days of supply.
- Ironically, an important alternative fuel for the electric generating companies is distillate fuel oil. If natural gas prices remain high, utilities could use more distillate this summer, hindering a buildup of heating oil stocks for the winter. Furthermore, with strong prices this winter, fuel switching from natural gas to distillate could become attractive in some regions, putting more pressure on distillate prices.
- EIA currently expects natural gas prices to remain high through the winter. Residential prices could average $8.00 per MCF versus $6.71 last winter. With colder weather, consumers will be using more fuel as well as higher priced fuel.