Propane Prices

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

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 accounts for almost a quarter of United States energy consumption, and the NYMEX Division natural gas futures contract is widely used as a national benchmark price. The futures contract trades in units of 10,000 million British thermal units (mmBtu). The price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border. An options contract and calendar spread options contracts provide additional risk management opportunities.

The spread between natural gas futures and electricity futures  the spark spread  can be used to manage price risk in the power markets.Because of the volatility of natural gas prices, a vigorous basis market has developed in the pricing relationships between Henry Hub and other important natural gas market centers in the continental United States and Canada. The Exchange makes available for trading a series of basis swap futures contracts that are quoted as price differentials between approximately 30 natural gas pricing points and Henry Hub. The basis contracts trade in units of 2,500 mmBtu on the NYMEX ClearPortsm trading platform. Transactions can also be consummated off-Exchange and submitted to the Exchange for clearing via the NYMEX ClearPortsm clearing website as an exchange of futures for physicals or exchange of futures for swaps transaction.The e-miNYsm natural gas futures contract, designed for investment portfolios, is the equivalent of 5,000 mmBtu of natural gas, 50% of the size of a standard futures contract. The contract is available for trading on the Chicago Mercantile Exchange (CME) GLOBEX electronic trading platform and clears through the New York Mercantile Exchange clearinghouse.

Source New York Mercantile Exchange, Inc.

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