EIA: low gas spot prices not bringing down retail prices

Natural Gas spot and delivered prices; Image: EIA
Natural Gas spot and delivered prices; Image: EIA

While natural gas wholesale spot prices in the U.S. have dropped to relatively low levels since the end of 2014, these low prices have not translated directly into lower retail prices for consumers who use natural gas to heat their homes and businesses, EIA said in a report.

This short-term lag is largely due to the nature of utility regulation. Over longer periods, changes in natural gas spot and residential prices are much more closely correlated, the report said.

Local distribution companies have several different ways to ensure adequate supplies of natural gas for the winter. Several of these approaches occur months before the heating season begins. For example, as a physical hedge, many LDCs begin buying and storing natural gas for the upcoming winter as early as April. LDCs can also purchase gas ahead of time for later delivery by using New York Mercantile Exchange futures contracts. These contracts lock in a certain price for the utility and help shield the company from fluctuations in the spot market.

To supplement their hedging, LDCs may buy additional natural gas as needed on the spot market during the winter heating season. These hedging approaches mean that residential and commercial prices often reflect the cost of gas purchased many months ago. Additionally, residential and commercial prices are regulated by the state regulator, and rate changes may significantly (by a year or more) lag changes in the LDC’s costs of purchasing natural gas.

Because natural gas is the primary heating fuel for about half of all U.S. households, consumers use more natural gas in the winter. EIA states that, somewhat counterintuitively, residential and commercial prices are higher on a per-unit basis during the summer. However, the variations in seasonal consumption often outweigh these differences in prices, so monthly expenditures are more likely to reflect large changes in consumption rather than relatively small seasonal differences in per-unit prices.(Source: LNG World News)

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