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Natural Gas Price Increase

The Hot Summer Pushes Prices Up

Written by Swagato Chakravorty
Posted July 26, 2012

Natural gas is riding high. A hot summer and an increasing switch-over from coal to natural gas in industrial facilities have contributed to a rise in natural gas prices of more than 70 percent in just the past three months.

From CNN:

"Hot weather forecasts and elevated cooling demands continue to provide a boost to the market,” Addison Armstrong, director of market research at the brokerage Tradition Energy, wrote in research note Tuesday.

Power utilities tend to rely on natural gas plants during times of peak electricity demand (such as during exceptionally hot days), since these plants can be brought up to full power and turned back off fairly fast.

At Henry Hub in Louisiana, natural gas has gone from $1.85 per million British thermal units (BTUs) back in April to $3.14 this Tuesday, the highest in seven months.

Alongside the heat, low prices early this year enticed many utility providers to switch over from coal-fired plants to using natural gas instead.

They also made some natural gas explorers switch their focus to oil, including companies like Exxon Mobil (NYSE: XOM), Chesapeake (NYSE: CHK), and Devon (NYSE: DVN).

In, there were around 900 drilling operations engaged in natural gas, with another 900 seeking out oil. In May, there were almost 1800 operations just in oil.

Demand has gone up while production has not kept pace. However, analysts claim that the rising price of natural gas will itself be a check upon the situation, since at around $3 per million BTUs, natural gas and coal are fairly equivalent.

From CNN:

“The current price level [for gas] is overvalued and is likely to decline and settle back,” Michael Fitzpatrick, editor of the industry newsletter the Kilduff Report, wrote Tuesday.

Energy demand will increase 58% over the next 25 years.

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