SIOUX FALLS, S.D. (KELO) — As February temperatures went down and stayed down, natural gas prices paid by those who supply the gas to homes and businesses went up.
South Dakota industry uses a little more than half of the natural gas while about 46% of residents use natural gas to heat their homes, according to an April 16 report from the U.S. Energy Information Administration (EIA). Another small percentage is used to produce electricity.
A mix of investor-owned, private and municipal energy companies supply natural gas to consumers.
While most have a contract for a supply of natural gas, a mix of factors this past February likely meant those suppliers needed more natural gas and paid a higher price for it.
Supply and demand was in full effect in February along with a supply crunch literally created by the cold.
Pipelines that carry natural gas from a site are considered common carriers and are regulated as such. The gas is sold wholesale and often under contract.
The South Dakota Public Utilities Commission sets the natural gas delivery rate for the three investor owned utilities that provide natural gas in the state, (MidAmerican, NorthWestern and MDU); those rates are unchanged. However, the PUC said the purchased gas adjustment charge is routinely adjusted to reflect actual costs of fuel.
The price of natural gas in the marketplace is not regulated. The federal government had regulated prices at the wellhead until the 1980s but by 1989, there was deregulation of the market.
Natural gas can be priced in units of dollars per therm, dollars per MMBtu, or dollars per cubic feet in the U.S.
Most residential customers, for example, will see price per therm on their bills.
A MMBtu is a million British Thermal Unit, which is a measurement of natural gas which is common when the wholesale market is discussed. Two other measurements that are key in terms of natural gas supply and demand: TcF is trillion cubic feet and BTU is a British Thermal Unit.
Henry Hub is the pipeline in Louisiana that serves as the official delivery point for futures contracts for natural gas so wholesale natural gas prices will refer to Henry Hub.
Higher natural gas prices on the wholesale market weren’t a complete surprise for this winter.
Prices for contracts have been increasing since at least October.
Yet, few would have anticipated the high of $23.86 MMBtu on Feb. 17 recorded at Henry Hub by the EIA. This was the highest, inflation adjusted real price since 2003, the EIA said. The average February price was $5.49.
The October contract price was $2.227/MMBtu and contract prices for November were $2.856 MMBtu, according to Sept. 25 post by OilPrice.com.
On Jan. 13, the EIA forecasted that the annual natural gas spot price at the Henry Hub would increase 98¢ per million British thermal units (MMBtu) to average $3.01/MMBtu in 2021.
Morgan Stanley Research predicted on Feb. 1 that the average natural gas prices would increase 48% year over year in 2021 to $3/MMBtu, pushing up capacity factors for coal plants and the sector’s carbon emissions.
Prices were expected to increase because of demand but also because of slowed or flat production. Flat production would be a carryover from 2020.
“Flat natural gas production is the result of falling production in several of the smaller natural gas producing regions being offset by growth in other regions, most notably in the Appalachia and Haynesville regions,” the EIA said in a Feb. 9, 2021 report.
Inventory of natural gas is measured in TcF. The higher the TcF, the more natural gas is available.
Back in October, the natural gas inventory was expected to exceed a record-high 4 TcF by the end of the month, according to the Natural Gas Intelligence. The actual inventory for the end of October was 3.9 TcF, according to the EIA.
But analysts were not getting excited about the large inventory, in part because they expected production would remain flat or lower than in 2020.
When the widespread extreme cold hit across at least 14 states, from the Canadian border to the Mexican border, demand increased dramatically over a prolonged period. Texas had record cold, which impacted demand but also the equipment needed to supply the natural gas.
So, high demand, flat production and issues with supplying natural gas combined to cause companies to pay more for natural gas than in a typical February winter.
The prices paid in February should be lower this month and in the following months, according to Kiplinger.
“Barring a late-season bout of widespread cold, we look for gas futures to stay under $3 per MMBtu this spring,” Kiplinger said online on March 1.
CME Group published the Henry Hub Natural Gas price at $2.656 as of 1:31 p.m. on March 8. The price fluctuates almost by second at that time of day.
On March 4, the EIA released a storage update as of Feb. 26. Storage of working gas was lower than the previous week. On Feb. 9, the EIA had expected that March would end with a natural gas inventory of 1.8 Tcf. The EIA said that would be about a five-year average.