Risk of Natural Gas Price Increases
The Energy Information Administration (EIA)’s price model shows that natural gas prices are likely to increase beginning this month and will trend upward through the end of next year. Perhaps more importantly, the potential magnitude of a price increase is far greater than a potential price decrease.
Prices averaged $2.61 per MMBtu this April. EIA predicts that April 2016 prices will increase to $3.10 per MMBtu. However, EIA’s 95 percent confidence interval ranges from a lower limit of $1.77 to an upper limit of $5.31. Compared to current prices, this represents a range of a 32 percent decrease to a 103 percent increase.
The confidence interval is based on data from options trading futures from the five trading days ending May 7. The options show what actual investors are speculating will happen to natural gas prices in the future.
Minor Electricity Price Increase
The current Outlook shows a 1.6 percent increase in average residential electricity prices. The Outlook shows industrial prices, which tend to react faster to changing fuel cost, falling by 2.4 percent this year and an additional 1.2 percent next year. These prices are averaged throughout the entire country. Regional prices are likely to show greater variation, with some markets seeing price increases and others seeing decreases. In particular, competitive electricity markets – including markets that allow retail choice – are more subject to natural gas price fluctuations.
Coal in Rapid Decline
The share of coal in the US energy mix is declining rapidly. According to the Energy Information Administration (EIA)’s Short Term Energy Outlook for May 2015, coal’s share of US electricity generation fell from 43.0 percent in the first two months of 2014 to 37.4 percent in the first two months of 2014. This 5.6 percentage-point decrease corresponded with a 3.9 percentage-point increase in the natural gas share, from 23.7 percent to 27.6 percent. For the full year, EIA projects that coal plant retirements will continue, while coal facilities will see reduced utilization. Natural gas use in April and May will nearly catch up to coal before coal use increases again over the summer to meet peak summer demand.