NEW YORK -- The frigid winter of 2014 is setting the price of natural gas on fire.
Friday, the price in the futures market soared to $5.18 per 1,000 cubic feet, up 10 percent, to the highest level in three and a half years. The price of natural gas is up 29 percent in two weeks, and is 50 percent higher than last year at this time.
Record amounts of natural gas are being burned for heat and electricity. Meanwhile, it’s so cold that drillers are struggling to produce enough to keep up with the high demand. So much natural gas is coming out of storage that the Energy Department says supplies have fallen 20 percent below a year ago -- and that was before this latest cold spell.
"We’ve got record demand, record withdrawals from storage, and short-term production is threatened," says energy analyst Stephen Schork. "It’s a dangerous market right now."
Natural gas and electric customers are sure to see somewhat higher rates in the coming months. But they will be insulated from sharp increases because regulators often force natural gas and electric utilities to use financial instruments and fuel-buying strategies that protect residential customers from high volatility.
To understand the price increase, just look at the thermometer. A second major cold snap this month is gripping much of the country, including the heavily-populated Northeast.
Natural gas is used by half the nation’s households for heating, making it the most important heating fuel. Electricity is the second most popular heating source, and electric power generators use natural gas to generate power more than any other fuel except for coal.
Commodity Weather Group, which predicts heating demand for energy companies and consumers, said in a report Friday that periodic breaks in the cold weather are expected to be "weaker and briefer, extending the duration of colder weather" in late January and early February.
There are a couple of other factors at play. In the past, much of U.S. natural gas was produced in the Gulf of Mexico. If weather disrupted supplies there, it was typically in the early fall, during hurricane season, when heating and electricity demand are low and natural gas storage facilities are mostly full in preparation for winter.
Now, much of U.S. production comes from on-shore formations that are more susceptible to cold, ice and snow. Wells that are not designed for such extreme conditions can freeze, halting production.
"Now the threat to production is when demand is at its highest," Schork says.