Natural Gas Is the Next Price To Watch

A stealthy energy market force that could cost you

Nov 21, 2018
Logistics

SMITH BRAIN TRUST  While consumers see and experience the effects of oil price volatility in a short space of time at the gas pump, there’s another energy market force that’s stealthy and poised to dent bank accounts in 2019.

It’s natural gas.

Its futures price was recently trading around $4.50, up from $3.50 this summer. “That’s a big shift,” says energy economist Charles E. Olson, professor of the practice and director of Maryland Smith’s Business Honors Program.

He says the price rise will likely increase monthly property bills for electricity, gas and the two combined by roughly 15 percent in the next year. Consumers can expect to see some price effects as early as April, given the 6-to-18 month lag time between initial drilling and when the production is brought to the market and usage is calculated into the bill.

"Higher prices are likely to result from lower storage levels and expanding exports," Olson says. "Currently U.S. natural gas prices are the lowest in the world and less than half Asian levels."

The bullish market shift is in the U.S. likely to continue, Olson says, despite mid-November’s wide price swing, through which an 18-percent hike preceded a 17-percent decline. "Buyers in natural gas hedging tend to lock in prices,” Olson says.

And, this complements several natural gas market fundamentals.

Frequent cold last winter, especially across the Midwest, boosted consumption and contributed to lower-than-normal U.S. natural gas storage, which is currently at a 15-year low and 16 percent below its level at this time in 2017. If forecasts for a similarly cold winter hold true, the stockpile will further shrink, Olson says, even as rising demand continues. Increased exporting, steady since 2007, has increased the expensive and time-consuming liquefied natural gas (LNG) storage and shipping.

“It takes a lot of natural gas to feed the LNG process – compounding the demand,” he says, adding that stagnant and declining demand for coal as a market alternative also plays a role.

When the winter-heating season ends, electric-gas customers should not be surprised to see they owe more, Olson says. “But frankly a lot of people have auto pay for these bills and may not notice, initially.”

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About the Expert(s)

OlsonCharles

Professor Charles E. Olson is Visiting Associate Professor and Director of the Honors Program at the Robert H. Smith School of Business at the University of Maryland. From 1986 - 2000 he was president of Zinder Companies, Inc., a public utility consulting firm. Prior to joining Zinder Companies, Inc., Olson was president of Olson & Co., Inc. from 1980 - 1986. Dr. Olson was assistant and then associate professor of business at the University of Maryland from 1968 - 76. His Ph.D. is from the University of Wisconsin - Madison.

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