As I have noted before, the larger a given state’s exposure to natural gas, the more likely electric rates will be higher, according to recent research from Lawrence Berkeley National Lab.
Gas has always been notoriously volatile. Some states have a bit of a buffer in that rates are set by Public Utility Commissions and don’t jump around, but in Texas, for instance, prices can fluctuate during times of high demand, and gas tycoons can make a killing during moments of crisis, such as the one that seems to be developing now.
I just spoke to a knowledgeable former State regulator, who told me that in times past, gas demand would peak in the winter heating season, so that during the rest of the year utilities could stock up and fill storage facilities.
Now, as we generate much more electricity from gas, the peaks are coming in the summer AC season as well, so price spikes in a “W” configuration, with peaks now in summer and winter.
Natural-gas prices have jumped 63% this week in response to forecasts calling for some of the coldest, snowiest weather in years to freeze the country from the West Texas desert to the Great Lakes.
The forecasts have stoked fears of a repeat of the deadly winter storm that froze Texas in 2021 and left millions of people without electricity for days. Energy producers and utilities are preparing for the worst. The Energy Department late Thursday ordered grid operators to be prepared to take extraordinary steps to tap in to backup power generation.
Subzero temperatures are in store for Minneapolis, Chicago and Detroit starting Friday. New York and Washington, D.C., are expecting to be buried in snow by the end of the weekend.
The big concern in energy markets is for Texas and other parts of the southern U.S., where uncommonly cold temperatures threaten to ice some of America’s most prolific oil-and-gas fields and wreak havoc on the power grid. Prices for electricity this weekend are already surging in Texas.
The biggest gains in natural-gas prices have been for near-term deliveries. Futures for February delivery of the heating and power-generation fuel had their biggest three-day percentage gain on record. Futures settled Thursday at $5.045 per million British thermal units, up from $3.103 at the end of last week.
The arctic blast has the potential to be felt in energy markets for a long time. Traders are anticipating a big chunk of U.S. production will become blocked in frozen wells when heating demand is highest, necessitating a huge drawdown of domestic stockpiles to keep furnaces and boilers running.
They are betting the incoming weather will be cold and persistent enough to change the outlook for domestic supply, which a week ago appeared headed for another glut that depressed prices and pinched producers. In just three trading sessions this week, natural-gas futures prices for delivery into next year have been lifted out of the danger zone for drillers, who notched daily production records in December.
The frigid forecasts caught many traders wrong-footed. A snowy start to the heating season lifted gas prices to their highest level since 2022, when fuel markets surged following Russia’s full-scale invasion of Ukraine. Unusually warm weather then sent them tumbling down. Traders piled into bets that prices would fall further.
“We were going into the weekend thinking we’d have a marginally warmer-than-normal January, because the first two weeks of January were the fifth-warmest of all time for the U.S.,” said Matt Rogers, a meteorologist and president of Commodity Weather Group, which advises traders. “The sentiment was that winter was winding down.”
In heating-degree days—a population-weighted measure of temperatures below 65 degrees Fahrenheit that traders use to gauge demand—forecasts are calling for the two weeks that end Feb. 4 to be the coldest since 1985, Rogers said. Longer-term forecasts suggest that frigid temperatures will linger deep into February.
Traders who bet that winter was over and that gas prices would fall have had to buy futures this week to cancel out those short positions, adding to this week’s price gains.
Research shows that an over-reliance on natural gas is associated with higher electric prices.