Lessons on playing the natural gas glut

Businesses and other big natural gas customers may benefit this winter by forgetting a valuable lesson they learned almost a decade ago.

The lesson gleaned from a scary roller coaster period of natural gas prices was from 2001 through 2005 was to lock in when you could. Sign forward purchase contracts to assure you can get the natural gas you need without busting the budget, the storyline went.

Don't play the market.

That advice has turned sour the last two winter heating seasons, according to energy consultant Bob Latham of Latham & Associates in Cedar Rapids. He said most of his clients who locked in hoping to avoid a winter price spike found out later they could have saved a lot more by paying the going market rate. That rate never spiked, especially during last winter's extremely mild temperatures.

A boom in natural gas recovery from known petroleum reserve areas and in the Bakken Shale formation, formed during the Late Devonian through the Early Mississippian ages, has created an environmental controversy over the use of hydraulic fracturing technology called fracking.

But it's also led to a handsome surplus of the heating fuel this winter.

Natural gas working inventories ended August 2012 at 3.4 trillion cubic feet - 13 percent above the same point in 2011, according to the U.S. Department of Energy's Short Term Energy Outlook released Sept. 11.

The agency said it expects the Henry Hub natural gas spot price, which averaged $4 per million British thermal units (MMBtu) in 2011, to average $2.65 per MMBtu in 2012 and $3.34 per MMBtu in 2013.

"By the first of November we're going to be jam-packed, with all the storage full," Latham said. "It doesn't make sense to lock in for fall or even next year."

On Sept. 11, the October futures price for natural gas was less than $3 per decatherm. The futures price for February is $3.42.

By January 2014, the futures price is prjected to be up to $4.01.

Latham said the forward contract price seems to factor in a speedup in the painfully slow economic recovery that would stimulate more industrial demand for natural gas. But he's not at all convinced that will be the case, and he's going out on a limb by advising clients not to pay the extra premium for locking in.

Ironically, consumers who use natural gas for heating may wind up paying more this winter than last - even if natural gas prices don't climb at all.

MidAmerican Energy projects the average residential customer's heating costs to be $91 higher for the 2012-2013 heating season Oct. 1 through April 30, 2012, compared to the same period of 2010-2011. That's an increase of 20 percent, or $556 compared to a bill of about $465 last winter.

The projection assumes relatively little change in natural gas prices, but a return to more normal - that is, colder - weather. Last winter's temperatures were about 21 percent warmer than average winter temperatures, said Tim Grabinski, MidAmerican's director of communication planning and advertising.

He pointed out three highly interrelated factors upon which actual heating costs will depend:

• The price of natural gas
• How cold temperatures gets
• How much natural gas customers consume.

Natural gas is Iowa's main heating fuel and the primary source for process heat used in industry. The man in charge of administering Iowa's Low Income Home Energy Assistance program isn't taking much solace in the recent run of low natural gas prices, however.

Iowa LIHEAP Coordinator Jerry McKim said low-income households could still be in a pinch this winter if Congress can't agree to keep the LIHEAP program funded adequately. Appropriations levels for the program haven't been set, and one version of the appropriations bill would direct more of the funding to southwestern and southern states.