Natural Gas Prices Expected to Stay Low

It is likely that prices of natural gas – now at their lowest in two decades – will be even lower during the home heating season next winter, Purdue University energy economist Wally Tyner says.

In another good sign for low energy costs for consumers, Tyner also expects gasoline prices to stay in the range of $2 to $2.50 a gallon for much of 2016.

Consumers already are seeing lower heating bills this winter even before the recent price drop. Tyner said that while the price of natural gas in December is the lowest it has been since 1994, consumers won’t see the full benefit of that in their gas bills this winter. That is because most of the natural gas that will be delivered this winter has already been contracted.

“However, it likely means that home heating costs will fall more next winter,” he said.

Tyner lists several “supply-and-demand drivers” that are keeping the price of natural gas so low:

• Natural gas is produced from both conventional and shale oil and gas formations, so the “fracking” boom has led to large supply increases of natural gas.
• The large supply increase has been faster than the rate of demand increase, so price has come down. Also, there is little international trade in natural gas, so the export market is quite limited.
• While the low price has discouraged additional drilling for natural gas, oil and gas drilling efficiency has increased tremendously the past 2-3 years.
• Normally, natural gas is put in storage in summer months, and the stored gas is used over the winter months. This year, however, so far the winter has been abnormally warm. Natural gas storage facilities are approaching full capacity, and limited additional storage is putting tremendous downward pressure on prices.

Tyner noted that natural gas is used not only by many consumers for home heating but also by industry for process heat and to generate electricity.

“Changes in natural gas prices, therefore, ripple widely through the economy,” he said.

For gasoline, Tyner explained that price prospects depend mainly on what happens to the price of crude oil. Crude oil briefly was about $32 per barrel in December 2008 and January 2009. Today, it is about $35. He said forecasts for crude prices for 2016 range from falling to about $20 to increasing to $60 or more.

“My sense is that we are near the bottom for crude oil and that it will remain relatively low for much of 2016,” he said.

Source: Keith Robinson and Wally Tyner, Purdue University