Natural gas prices Totally Explained

Everything about Natural Gas Prices totally explained

Natural gas prices, as with other commodity prices, are driven by supply and demand fundamentals.==Natural Gas Demand== The demand for Natural Gas is mainly driven by the following factors:

Weather
Demographics
Economic Growth
Fuel Competition
Storage

Exports

Sector	2005 (Bcf)
US Residential	4,838
US Commercial	3,057
US Industrial	6,608
US Electric Power	5,797
US Other	1,650
Total US Demand	21,950
US LNG Exports	65
US Exports to Mexico	305
Total US Gas Disposition	22,320
Canada Residential	602
Canada Commercial	442
Canada Industrial/Power	1,428
Total Canadian Demand	2,472
Total N.A. Demand	24,421
Total N.A. Disposition	24,791

Weather

Natural gas demand usually peaks during the colder months of the year (November-March) and winds down during the warmer months. During the warmest summer months, the demand increases due to electricity generated by gas fired power plants. Any adverse weather conditions will increase the demand for natural gas. The colder the weather is during the winter, the more pronounced the winter peak will be. On the other hand, a warmer winter usually results in a less noticeable winter peak. The opposite applies for the summer. If the summer season is extremely hot, it can result in greater cooling demands, which in turn may result in increased summer demand for natural gas.

Demographics

Changing demographics also affects the demand for natural gas, especially for core residential customers. In the US for instance, recent demographic trends indicate an increased population movement to the Southern and Western states. These areas are generally characterized by warmer weather, thus we could expect a decrease in demand for heating in the winter, but an increase in demand for cooling in the summer. As electricity currently supplies most of the cooling energy requirements, and natural gas supplies most of the energy used for heating, population movement may decrease the demand for natural gas for these customers. However, as more power plants are fueled by natural gas, natural gas demand could in fact increase.

Economic Growth

The state of the economy can have a considerable effect on the demand for natural gas in the short term. This is particularly true for industrial and to a lesser extent the commercial customers. When the economy is booming, output from the industrial sectors generally increases. On the other hand, when the economy is experiencing a recession, output from industrial sectors drops. These fluctuations in industrial output accompanying the economy affects the amount of natural gas needed by these industrial users. For instance, during the economic recession of 2001, natural gas consumption by the industrial sector fell by 6 percent.

Fuel Competition

As we stated previously, supply and demand dynamics in the marketplace determine the short term price for natural gas. However, this can work in reverse as well. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the ability to switch the fuel which they consume. In general the core customers (residential and commercial) don't have this ability, however, a number of industrial and electric generation consumers have the capacity to switch between fuels. For instance, when natural gas prices are extremely high, electric generators may switch from using natural gas to using cheaper coal or fuel oil. This fuel switching then leads to a decrease for the demand of natural gas, which usually tends to drop its price.

Storage

North American natural gas injections (positive) represent additional demand and compete with alternative uses such as gas for heating or for power generation. Natural gas storage levels have a significant impact on the commodity’s price. When the storage levels are low, a signal is being sent to the market indicating that there's a smaller supply cushion and prices will be rising. On the other hand, when storage levels are high, this sends a signal to the market that there's greater supply flexibility and prices will tend to drop.

Exports

Exports are another source of demand. In North America, gas is exported within its forming countries, Canada, the US and Mexico as well as abroad to countries such as Japan.

Natural Gas Supply

The supply for Natural Gas is mainly driven by the following factors:

Pipeline Capacity

Storage

Gas Drilling Rates

Natural Phenomena

Technical Issues

Imports

	2005 (Bcf)
Total US Production	18,243
Total Canada Production	6,022
Total N.A. Production	24,265
US Imports and Supplementals	340
Total N.A. Supply	24,605

Pipeline Capacity

The ability to transport natural gas from the well heads of the producing regions to the consuming regions affects the availability of supply in the marketplace. The interstate and intrastate pipeline infrastructure has limited capacity and can only transport so much natural gas at any one time. This has the effect of limiting the maximum amount of natural gas that can reach the market. The current pipeline infrastructure is quite developed, with the EIA estimating that the daily delivery capacity of the grid is . However, natural gas pipeline companies should continue to expand the pipeline infrastructure in order to meet growing future demand.

Storage

As natural gas injections (positive) represent additional demand, withdrawals (negative) represent an additional source of supply which can be accessed quickly.

Gas Drilling Rates

The amount of natural gas produced both from associated and non-associated sources can be controlled to some extent by the producers. The drilling rates and gas prices form a feedback loop. When supply is low, demand and thus prices are high; this gives a market signal to the producer to increase the number of rigs being drilled for natural gas. The increased supply will then lead to decrease the pricing.

Natural Phenomena

Natural phenomena can have a significant impact on natural gas production and thus supply. Hurricanes, for example, can have an impact on the offshore production and exploitation of natural gas. This is because safety requirements may mandate the temporary shut down of offshore production platforms. Tornadoes can have a similar effect on onshore production facilities.

Technical Issues

Equipment malfunction, although not frequent, could temporarily disrupt the flow across a given pipeline at an important market center. This would ultimately decrease the supply available in that market. On the other hand, technical developments in engineering methods can lead to more abundant supply.

Imports

Imports are a source of supply. In North America, gas is imported within its forming countries, Canada and the US as well as abroad in the form of LNG from countries such as Trinidad, Algeria and Nigeria.

Trends in natural gas prices

The chart shows a 75-year history of annual United States natural gas production and average wellhead prices from 1930 through 2005. Prices paid by consumers were increased above those levels by processing and distribution costs. Production is shown in billions of cubic meters per year, and average wellhead pricing is shown in United States dollars per per thousand cubic meters, adjusted to spring, 2006, by the U.S. Consumer Price Index.
Through the 1960s the U.S. was self-sufficient in natural gas and wasted large parts of its withdrawals by venting and flaring. Gas flares were common sights in oilfields and at refineries. U.S. natural gas prices were relatively stable at around (2006 US) $30/Mcm in both the 1930s and the 1960s. Prices reached a low of around (2006 US) $17/Mcm in the late 1940s, when more than 20 percent of the natural gas being withdrawn from U.S. reserves was vented or flared. While supply interruptions have caused repeated spikes in pricing since 1990, longer range price trends respond to limitations in resources and their rates of development. As of 2006 the U.S. Interior Department estimated that the Outer Continental Shelf of the United States held more than 15 trillion cubic meters of recoverable natural gas, equivalent to about 25 years of domestic consumption at present rates. Total U.S. natural gas reserves were then estimated at 30 to 50 trillion cubic meters, or about 40 to 70 years consumption.

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