Edition 2

F E D E R AL E N E R G Y R E G U LAT O R Y C OMMI S S I O N

0 2 •0 1•2006

“Given weather conditions this winter, supply

overall appears to be adequate for U.S. needs

through the winter, though prices could still spike

on cold weather and local deliveries could be

affected by local prices.”

Winter 2005-2006 Natural Gas Market Update 

January 19, 2006

High Natural Gas Prices:

The Basics
2

Natural gas prices have fallen 

in recent weeks.

-

5.00

10.00

15.00

20.00

5/1/05 6/1/05 7/1/05 8/1/05 9/1/05 10/1/05 11/1/05 12/1/05 1/1/06

Katrina

Rita

Next Day Spot Price 

at Henry Hub, La.

1/31/06

Production recovery in the Gulf of Mexico

is strong.

Recovery efforts in the Gulf of Mexico have returned

almost three-quarters of the supplies shut in by storm

damage, both offshore and onshore, in Louisiana.

Today, about 2.4 billion cubic feet (Bcf) remains shutin, 1.8 Bcf offshore and 0.6 Bcf onshore in Louisiana.

Combined with lower consumption because of weather, this recovery has alleviated most of the immediate

supply concerns for the winter of 2005-2006.

5

10

15

20

5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1 1/1

$/MMBtu

Wholesale Gas

(New York)

Residual Fuel Oil

(No. 6, 0.3% Sulfur, 

New York)

Heating Oil

(No. 2, New York) 

Derived from Intercontinental Exchange.

Derived from Intercontinental Exchange.

F E D E R AL E N E R G Y R E G U LAT O R Y C OMMI S S I O N

0

2,000

4,000

6,000

8,000

10,000

8/29 9/12 9/26 10/10 10/24 11/7 11/21 12/5 12/19 1/2

Katrina 

Rita

Wilma 

Shut-in Louisiana 

State Production

Shut-In Offshore

Gulf Production

Derived from Minerals Management Service (MMS) and 

the Louisiana Department of Natural Resources.

Natural Gas Price ($/MMBtu)

Oil and Gas Prices ($/MMBtu)

Shut-In Gulf Production (MMcf/day)

Natural gas prices rose significantly in 2005, trading

for as much as $16.00 per MMBtu in national production-area spot markets after hurricanes Rita and

Katrina. Since then, prices have fluctuated with

changing weather – lower during a warm November,

higher during cold weather in early December and

lower again during mild weather through January. As

of January 23, prices were at $8.25 per MMBtu at the

Henry Hub, slightly higher in consuming areas of the

East and lower in the rest of the country. These prices

are much lower than peak prices in 2005, but still high

by historical standards.

Natural gas prices have fallen to the point where oil

prices appear to be holding them up. Except during

weather-driven periods, gas prices normally fall

between those for residual fuel oil (as a low) and heating oil (as a high). After the hurricanes, and again during cold weather in December 2005, gas prices rose

above that range. Recently, however, the gas price has

fallen near the bottom of that range and may not fall

much further at current oil prices. In New York, for

example, the gas price has not dropped far below residual fuel oil for any significant length of time in years. 
0 2 •0 1•2006

What is the Commission doing to respond

to high gas prices?

The Commission is acting to make sure that natural

gas prices reflect the true balance between supply and

demand, and not artificial constraints in the system

or the exercise of market power. It has:

• Strengthened its enforcement policy, adopting

new market manipulation rules and implementing its new civil penalty authority (up to 

$1 million per day, per violation) in a manner 

to encourage a strong compliance program. 

• Improved its ability to detect new market 

manipulation by implementing a

Memorandum of Understanding with the

Commodity Futures Trading Commission. 

• Established a strong monitoring system for the

market to make sure that the Commission

detects any market manipulation that might

arise during this time of high prices. 

• Issued orders immediately after the hurricanes 

that let market participants move gas in new

ways that avoided bottlenecks caused by the 

hurricane damage. 

• Approved applications for a substantial 

expansion of the Nation’s LNG terminals for

receipt of imported gas. 

• Shown a strong record of approving applications

for new pipelines in a swift and environmentally

responsible way. 

• Approved changes to pipeline tariffs to help

pipelines force compliance with operational

flow orders to maintain system reliability. 

It is important to remember that the Commission

does not directly regulate most wholesale natural gas

prices, which were decontrolled in 1989 to prevent

the severe inefficiencies and shortages of the 1970s

from recurring. It has no jurisdiction over retail gas

prices.

The natural gas industry entered the winter with high 

levels of gas storage, despite the supply interruptions

from the hurricanes. This was a sensible insurance 

policy against the possibility of a cold winter. As

weather has remained warm in January, storage levels

have remained high (near the top of the five-year

range). Withdrawals from storage have been relatively

low – consistent with warm weather and high prices.

As a result, storage inventories are as high as they have

been at this time of the year in any of the last five

years.

Derived from Energy Information Administration through

1/20/06.

F E D E R AL E N E R G Y R E G U LAT O R Y C OMMI S S I O N

3

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

5-year range 2004-05 2005-06

Storage Inventories 2000-2006 (Bcf)
Disclaimer: This document reflects the views of the Commission staff and not necessarily the views of the Commission itself or any individual Commissioner.

0 2•0 1 •2006

F E D E R AL E N E R G Y R E G U LAT O R Y C OMMI S S I O N

4

What can you as a customer do about high

natural gas prices?

You can cut your own natural gas bill through conservation –

see (for example) the Department of Energy’s website

http://energysavers.gov for practical suggestions on conservation. When you conserve, you also help everyone else,

since reduced consumption lowers stress on the whole gas

industry and tends to lower prices. 

How will imports affect the American market? 

The United States produces 84 percent of the natural

gas it consumes. The United States imports the remainder from Canada and from overseas as liquefied natural

gas (LNG). Canada is part of the same basic market

with the United States and sees the same tightness

between demand and supply that we do. For overseas

shipments, the United States competes with other consuming countries in Europe and Asia. Even where spot

markets are active (for example, in the United

Kingdom), prices can be higher than in North America.

This winter, Europe has seen very cold weather and

much higher prices than the United States. As a result,

where contracts permit, gas sellers have diverted LNG

deliveries to Europe to take advantage of the high prices,

and deliveries to the United States have been lower than

last year. 

In the future, more natural gas producing countries will

be building plants to liquefy natural gas, increasing

overall supply. As a result, LNG is likely to be an

increasing part of natural gas supply in the United States. 

Federal Energy Regulatory Commission

888 First Street NE • Washington DC 20426

For further information on natural gas:

www.ferc.gov/industries/gas.asp

If you have any questions please contact:

Office of External Affairs • 202-502-6088

1-866-208-3372 (toll free) • 202-502-8371 (TTY)

customer@ferc.gov

Where are gas prices headed from here?

Before the hurricanes, natural gas prices had reached

levels that reflected an ongoing tightness between 

supply and demand. Despite the warm weather this

winter, markets appear to expect natural gas prices 

to remain high in historical terms for some years 

to come.

In the near term, the best guess from the market is that

prices will probably remain near current levels for the

next month or two and then trend higher through the

summer as the electric power load picks up. The relatively low price for the rest of this winter reflects high

gas storage inventories resulting from warm weather so

far. Forward prices for next winter are 30 percent to 40

percent higher than current prices. In future years, forward prices anticipate slightly lower prices each year,

with recurring peaks in the winter.

These forward prices are not price predictions – only

what the market is willing to trade at now for the

future. In practice, weather will continue to be the

most important factor in determining prices. A very

hot summer or cold winter would tend to increase gas

prices, while mild weather would do the opposite.

$8.50

$9.00

$9.50

$10.00

$10.50

$11.00

$11.50

$12.00

$12.50

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08

Gas Forward Curve ($/MMBtu)

Derived from NYMEX data from 1/30/06.