What Are Residential Customers Paying For in Their Natural Gas Bills?

Natural Gas Weekly Update_1289083255463

Overview of Natural Gas Prices for the week ending November 3, 2010

* Price changes were mixed this week, with much regional variation across the country. At the Henry Hub in Erath, Louisiana, prices posted a net decline on the week of 2 cents, falling from $3.37 per million Btu (MMBtu) on Wednesday, October 27, to $3.35 per MMBtu on Wednesday, November 3.

* At the New York Mercantile Exchange (NYMEX), the December 2010 futures contract (which became the near-month contract on October 28) rose $0.073 from $3.763 per MMBtu last Wednesday to $3.836 yesterday.

* Working natural gas in storage increased to 3,821 billion cubic feet (Bcf) as of Friday, October 29, according to the Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report.

* The West Texas Intermediate crude oil spot price rose on the week from $81.9 per barrel (or $14.12 per MMBtu) to $84.45 per barrel ($14.56 per MMBtu).

* The natural gas rotary rig count, as reported Friday, October 29, by Baker Hughes Incorporated, rose by 2 to 967. The rig count has mainly remained flat over the past several months.

Overview of Natural Gas Prices for the week ending October 13, 2010

  • Natural gas spot prices posted gains at most markets across the lower 48 States since Wednesday, October 6, accompanied by double-digit increases in trading since the holiday weekend. Price increases on the week ranged up to 25 cents per million Btu (MMBtu), with the Henry Hub natural gas spot price increasing $0.02 per MMBtu since last Wednesday, averaging $3.58 per MMBtu in trading yesterday, October 13.
  • At the New York Mercantile Exchange (NYMEX), the futures contract for November delivery at the Henry Hub settled yesterday at $3.696 per MMBtu, falling by $0.169, or about 4 percent, since the previous Wednesday.
  • Natural gas in storage totaled 3,590 billion cubic feet (Bcf) as of October 8, about 7.4 percent above the 5-year (2005-2009) average. The implied net injection for the week was 91 Bcf.
  • The spot price for West Texas Intermediate (WTI) crude oil decreased by $0.18 per barrel since Wednesday, October 6, ending the report week at $83.03 per barrel, or $14.32 per MMBtu.

Overview for the week ending October 6, 2010

* Natural gas spot prices fell at most pricing point locations across the board in the lower 48 States as demand fell. The price at the Henry Hub fell 25 cents, or about 7 percent, since last Wednesday, September 29, from $3.81 per million Btu (MMBtu) to $3.56 per MMBtu.

* The West Texas Intermediate crude oil spot price settled at $83.21 per barrel, or $14.35 per MMBtu, on Wednesday, October 6. This represents an increase of $5.36 per barrel, or $0.92 per MMBtu, from the previous Wednesday.

* Working natural gas in storage increased to 3,499 billion cubic feet (Bcf) as of Friday, October 1, according to the Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report. Inventories are 220 Bcf greater than the 5-year (2005-2009) average for this time of year.

* At the New York Mercantile Exchange (NYMEX), the November 2010 contract fell about 10 cents or 2 percent from the $3.962 per MMBtu the previous Wednesday to $3.865 yesterday.

* The natural gas rotary rig count, as reported on October 1 by Baker Hughes Incorporated, fell by 5 from 967 to 962. Though this is the second week in a row the rig count has fallen, natural gas rigs have oscillated somewhat, from 947 on June 4 to 992 on August 13, over the past few months.

source: energy information agency

Overview (For the Week Ending Wednesday, September 29, 2010)

  • Natural gas spot prices at most market locations in the lower 48 States decreased between 5 and 10 percent this report week (Wednesday to Wednesday, September 22–29). The week coincided with the first week of fall, a season in which demand is typically lower given the lack of extreme weather conditions across the country. During the report week, the Henry Hub spot price decreased by $0.21 per million Btu (MMBtu), or 5 percent, to $3.81 per MMBtu.
  • The price of the October futures contract at the New York Mercantile Exchange (NYMEX) at final expiration on September 28 was $3.84 per MMBtu, or about 3 cents more than the price of the contract at the end of its first day of trading as the near-month contract on August 30. The November contract finished the report week at a price of $3.96 per MMBtu, or 13 cents lower than the previous Wednesday.
  • During the week ending Friday, September 24, estimated net injections of natural gas into underground storage totaled 74 billion cubic feet (Bcf). Working natural gas in underground storage was 3,414 Bcf, which is 6.3 percent above the 5-year (2005-2009) average.
  • The West Texas Intermediate (WTI) crude oil spot price increased $4.87 per barrel during the report week. The WTI crude oil spot price averaged $77.85 per barrel yesterday (September 29), or $13.42 per MMBtu.

The price of natural gas has two main parts (all cost estimates include a number of taxes):Transmission and distribution costs – to move the natural gas by pipeline from where it is produced to the customers local gas company, and to bring the natural gas from the local gas company to your house.Commodity costs – the cost of the natural gas itself.In the past five winters (2002-2003 through last winter) the cost of natural gas at the wellhead (commodity cost) has constituted more than 50 percent of the residential price,and this trend is expected to continue through the next winter (Figure 1). This relative cost pattern differs from earlier years in which the commodity cost was consistently below 50 percent. The large commodity cost share has resulted from unusually high prices for natural gas during these winters. The high prices were driven by market conditions that included weak natural gas production despite increased drilling levels, colder-than-normal weather for long periods during some heating seasons, production disruptions from hurricane activity in the Gulf of Mexico, fluctuating net import levels, and record high crude oil prices.

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Natural gas prices seem to make the news every few months. You will hear about it during hurricane season, and you saw how Hurricane Katrina affected natural gas prices. You will also read about natural gas when temperature spikes. Whether it’s because of soaring hot temperatures, which means electric companies need to buy more natural gas to generate electricity, or it may be because of a cold snap so consumers are using more natural gas to keep warm.

When these events take place, you will see natural gas prices move quite a bit. An investor or speculator might want to trade this market. There are several ways to trade natural gas. One way would be to trade natural gas futures on the New York Mercantile Exchange. Natural gas futures trading can be very risky. You only have to put up 5% margin in order to trade it. This gives you tremendous leverage, but remember, leverage cuts both ways. If you put up 5% margin and the price of natural gas increases 5%, you’ve doubled your money. On the other hand, if prices decrease 5%, you’ve just been wiped out. Natural gas futures trading can be profitable, but it will take nerves of steel and dedication to following this market.

Another way to trade natural gas would be buying stock in individual natural gas companies. In this case you may be putting all of your money in one basket if you select just 1 or 2 stocks. This will take plenty or research on your part to find the right companies to invest in. Do you want to invest in natural gas exploration and drillers, or do you want to invest in natural gas pipeline owners? Do you only want to invest in natural gas stocks that pay a dividend? These are choices you have to make before investing.

This brings us to natural gas ETFs. ETF stands for exchange traded fund. ETFs have become very popular over the last several years. Not only can you trade a natural gas ETF, but you can find ETFs for other physical commodities too.

You can find a natural gas ETF like the United States Natural Gas Fund, LP, ticker symbol UNG which only trades natural gas futures (more on that later). The UNG fund is very focused and specific on what is in the fund. An example of a fund that will have many stocks and component to it is the SPDR S&P Oil& Gas Exploration & Production Fund, ticker symbol XOP. This energy ETF will invest in the index of stocks of companies that are involved in the production and exploration of natural gas.

Now you may ask yourself why not just invest in a natural gas mutual fund? You certainly can, and there are good ones out there, but you will need to consider a few things before investing.

With mutual funds, you will need to know what stocks are in that fund. Is that mutual fund focused on a specific sector of natural gas, or is it a catch all for anything natural gas related?

What about the expense ratio of a natural gas mutual fund? This is something most investors overlook when buying into a fund. There are some funds that charge over 1% to be in their funds. That can be an enormous drag on your performance. Is there a minimum time to hold that mutual fund? Some mutual fund companies will place restrictions on how often you can move in and out of the fund, while other will charge you a fee if you redeem it in 30 or 60 after first buying into it. They do this to stop investors from day trading the mutual fund, but what if you need to get your money out for an emergency? What about trying to sell your shares during the day? With a mutual fund, you can only buy and sell at the closing net asset value of the stock each night.

ETFs can look like a mutual fund by investing in several different companies in a sector. Where an ETF differ from a mutual fund is in the way you can trade it. No matter which natural gas ETF you invest in, you can trade it like a regular listed stock. You can buy and sell it throughout the day, unlike mutual funds where you can only get one price. ETFs can become a vehicle for day traders. Another advantage of a gas ETF is that you can place stop limit orders on it. If there is news that will adversely affect the price of your ETF, you can place a sell stop order that will immediately liquidate your position when it hits your price. If you invested in a mutual fund, you couldn’t get out until the end of the day. There would be nothing you can do as you watch the value of your natural gas mutual fund erodes.

The United States Natural Gas Fund, LP (UNG)

This is by far the most popular natural gas ETF. This fund invests solely in the front month natural gas futures contract on the New York Mercantile Exchange. The natural gas futures on NYMEX are the mostly widely traded and liquid market for Nat gas futures. This fund will attempt to match the daily price returns of the underlying futures contract. You are essentially trading natural gas future but with a twist. The fund DOES NOT use leverage when investing in futures. This will help protect the fund from wild swings due to leverage. As the month ends, the fund will then start to “roll” out of the front month futures contract before it expires and will “roll” in to the next month futures contract. This is a long only fund. So if you are bullish on natural gas prices, this may be a fund you should look into.

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