Weak Natural Gas Prices Set To Lower Winter Heating Costs

High gasoline prices have weighed on household budgets this year, but relief from energy costs should arrive, surprisingly, when temperatures start to tumble this winter.

Natural gas, used to heat nearly half of U.S. homes, is expected to hit some of the lowest winter prices in years as rising production and a mild autumn send U.S. stockpiles of the fuel to record levels.

Normally, natural-gas prices surge beginning in December as cold blankets the U.S. and residents raise their thermostats. But the supply glut is pushing down futures prices throughout the winter, and utilities have responded by locking in low prices that they can pass on to consumers and, in some cases, are cutting rates.

Natural gas futures for November delivery settled 3.7% lower at $3.553 a million British thermal units Tuesday on the New York Mercantile Exchange, near 11-month lows. But futures contracts that provide gas delivery in January, which would likely be use by utilities to hedge winter demand, offer an even better bargain.

Nymex futures for January 2012, settled at $3.927/MMBtu Tuesday, well below the key $4/MMBtu level. While this is higher than the current front-month price, it was the lowest January settlement since 2002 for this time in October.

"These are extremely low prices for this stuff," said John Woods, a natural gas trader at JJ Woods Associates.

New Jersey utility Public Service Electric and Gas, a subsidiary of Public Service Enterprise Group Inc. (PEG), lowered its natural-gas rates by 1.3% beginning Oct. 1. National Grid projects lower natural-gas heating costs this winter due to the recent price declines. So is Consolidated Edison Inc. (ED), which supplies energy to 1.1 million residents in New York.

ConEd said Tuesday it expects average residential gas-heating bills this winter to fall by 3.8% from last year. The drop comes despite a rate increase, and should lower the average monthly heating bill this winter to $350 a month.

ConEd spreads its gas purchases and hedging throughout the year. Roughly 40% of winter supplies are already in storage, much of it at the relatively low prices seen this summer. The regulated utility also hedges as much as 15% of its supply using the futures market. With most of those hedges already in place, ConEd has locked in some of the lowest prices in years.

"We've formed up a good portion of the supply at favorable prices," said Joseph Oates, ConEd vice president of energy management.

An "Indian summer" of mild weather through October raised natural gas storage levels to 3.521 trillion cubic feet last week, close to record levels. Another massive increase is expected Thursday, suggesting there will be plenty of the fuel as heating demand rises.

The U.S. this year is experiencing the return of the La Nina weather pattern, which is a cooling of Pacific Ocean temperatures. La Nina typically raises temperatures in the northern half of the U.S. and lowers them in the south, says Dan Leonard, senior meteorologist with Weather Services International.

"We really expect that we should continue to see it for the next month or so," Leonard said.

Winter prices near $4 would mark a low point for domestic producers struggling under the influx of shale gas from booming fields in Pennsylvania, North Dakota and other regions of the U.S. The controversial hydraulic fracturing drilling process has rapidly increased domestic gas supplies, and utilities, producers and traders are still scrambling to adjust to the changes.

"The old expectation was to see a substantial rise, a 30%-50% rise, in the winter" for prices, says Ben Schelisinger, president of BSA Energy, which advises companies on the natural gas market. "Given what's been going on in the last 18 months, the history has really has gone out the window."

-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; jerry.dicolo@dowjones.com

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