BGE less positive on price of fuel

Oct. forecast altered with arrival of cold

December 05, 2006|By Paul Adams | Paul Adams,Sun reporter

Baltimore Gas and Electric Co. delivered yesterday a slightly less optimistic forecast for customers' winter heating bills as a blast of arctic air blanketed the region and gave the Mid-Atlantic its first real taste of cold weather this year.

Maryland's largest utility says natural gas customers can expect to pay 10 percent less to heat their homes this winter compared with a year ago, down from the 15 percent year-over-year decline forecast in October. Recent cold weather in many parts of the country and historically high crude oil prices have contributed to rising natural gas and fuel oil prices during the past several weeks. Natural gas tends to track crude oil prices in futures markets.

The recent bump in heating fuel prices comes despite unusually warm weather throughout much of November, record amounts of natural gas in storage and above-average heating oil stocks heading into the core winter months.

The price of fuel oil used for heating homes is up slightly more than 1 percent compared with a year ago, while benchmark futures for natural gas are off more than 40 percent from a year ago.

"Probably most of the change we're seeing is just due to the weather," said Wayne Harbaugh, BGE's manager of pricing and regulatory services. "Again, we've had very cold weather in the Midwest, which uses a lot of natural gas."

BGE, which serves more than 600,000 natural gas customers, said the average household could expect to pay about $695 during the heating season, compared with $773 for the corresponding period a year ago.

Futures markets for natural gas and fuel oil have fluctuated along with weather forecasts in recent weeks, taking consumers along for the ride. Natural gas prices climbed 4 percent last week after meteorologists predicted below-average temperatures well into December. Heating oil futures jumped 11 percent during the same period.

But a revised forecast - this time calling for a return to warmer weather - sent futures prices for both commodities down sharply yesterday. If the trend continues, BGE's latest forecast might prove too pessimistic.

On the New York Mercantile Exchange, natural gas for January delivery dropped 7.3 percent yesterday to $7.806 per million British thermal units, a standard industry measure. Natural gas was trading at slightly more than $4 per million BTU as recently as September, not long before BGE released its original forecast of a 15 percent decline in winter heating costs. Heating oil futures for January delivery fell 2.1 percent to $1.8089 per gallon in trading yesterday.

Some Baltimore heating oil suppliers said their prices are about the same as a year ago.

"Our purchase price is roughly 1 cent a gallon more than it was a year ago," said Mack McKemy, production manager for Home Fuel Co. Inc. in Sparrows Point.

McKemy said retail prices, however, are about 10 percent less than they were at this time last year, though he had been expecting a 15 percent to 20 percent increase from a year ago.

"It's less than what I would have predicted," McKemy said.

The federal Energy Information Administration says retail heating oil averaged $2.378 per gallon a week ago. That was down 3.9 cents from a year ago.

Analysts say there is room for natural gas prices to come down further, given current conditions. The nation's supply of natural gas stored in some 400 underground caverns hit a peak of more than 3.5 trillion cubic feet in October, and remains at record levels. The hurricane season ended with no disruption in production and temperatures have been mild until recently.

"The market is amply supplied at this point because of the high level of storage, and November was perhaps one of the very warmest on record," said Jim Osten of Global Insight, a Waltham, Mass.-based economic forecasting firm. "That should depress prices, and yet prices haven't shown that yet."

As is typical among utilities, BGE buys about 40 percent of its expected natural gas supply during summer months, when prices tend to be lower. The gas is stored in underground caverns in West Virginia and elsewhere.

Another 10 percent of its supply is locked in through financial contracts, which promise future delivery at a fixed price. The utility buys the other half in monthly natural gas auctions, where prices rise and fall depending on weather and other factors.

The company has no control over those prices and passes the costs directly to consumers. A mild winter with ample supplies can send prices sharply lower, while unexpected supply disruptions or cold weather can have the opposite effect.

Osten said continued high oil prices and uncertainty about weather will keep futures markets active in coming weeks. If expectations for a mild El Nino prove true, prices may fall further, he said. An El Nino, or warming of Pacific waters, tends to lead to mild winter weather throughout much of North America.

paul.adams@baltsun.com

Sun reporter Tyeesha Dixon contributed to this article.

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