The price of natural gas is determined by changes in the market supply and demand as is the case with any essential commodity. There aren’t many alternatives for natural gas in the world, which is why small changes in the supply or demand of the commodity can result in significant price movements that are often hard to anticipate. These price movements are necessary to restore the balance between supply and demand.
The rule of thumb with natural gas pricing states that an increase in supply lowers the price of natural gas while an increase in demand causes the price to rise. With this in mind, we can list seven influential factors that are usually responsible for any changes in the price of the natural gas.
1) Improved Production Triggers Changes in the Domestic Natural Gas Supply
Most of the gas consumed in the United States is made available through domestic production. The dry gas production of the United States increased from the year 2006 to 2014. During this period of time, the supply or production of natural gas reached the highest recorded yearly total. Efficient, cost effective drilling and completion techniques can be credited for this record production. These techniques produced the best results in shale and other tight geological formations. As mentioned before, an increase in the supply of natural gas results in a price decrease. There was a considerable drop in the average wholesale (or spot) prices of natural gas throughout the United States in the year 2012 when supply was significantly high.
2) Harsh or Hostile Weather Conditions
The United States is no stranger to natural disasters. We are constantly faced with the threat of devastating hurricanes, torrential rain, blizzards and other severe weather conditions that can directly disrupt the natural gas supply. A prime example is in 2005, when multiple hurricanes along the Gulf Coast reduced natural gas production by 4% for approximately one year. Understandably, the prices of natural gas were on the rise during that period of time.
3) Economic Growth
The natural gas market is greatly influenced by the strength of a country’s economy. When the economy is blossoming and growing, there is a significant increase in the demand for goods and services in both the commercial and industrial sectors of the economy. This generates a greater need for natural gas across multiple industries. The industrial sector uses natural gas as a fuel and a feedstock for a number of products including pharmaceuticals and fertilizers. The overall increase in the demand throughout the country gives producers the incentive to increase the supply of natural gas. It also paves the path for an increase in the market price of natural gas. In other words, a growing economy enhances the consumer’s willingness to demand more and pay more. On the other hand, a declining economy or an economy that is in recession produces the opposite effect on the natural gas market.
4) Residential and Commercial Demand Changes During Winter
During the cold days of winter, the consumption of natural gas in the commercial and residential sector goes up. People need the gas to power their heating systems. This sudden increase in the demand for natural gas triggers an upward price trend. Severe weather conditions such as an abrupt drop in the temperature can cause havoc in the market. This is because the producers can’t react quickly enough to the short term increase in the demand. As a result, the effect on price intensifies. It is also worth noting that the effect on the price of natural gas caused by severe weather conditions may turn out to be even more drastic if the natural gas transportation system is already functioning at full capacity.
5) Natural Gas Storage Fields
The overall supply of natural gas in the United States can be heavily influenced by the amount of gas that is available in storage fields. These storage fields are located underground and can hold an extremely large amount of natural gas. Storage fields were built to meet seasonal and sudden increases in demand. As mentioned before, it is not possible for the domestic producers to always meet the rapidly rising demand for natural gas in the short run. Importing natural gas is also not a reliable solution during a severe shortage in supply. When the demand is low again, the storage absorbs excess domestic production and low cost imports. Pipeline operations and hub services are also supported by the storage fields.
6) Competition with Other Energy Resources
Large volume fuel consumers such as iron, paper, steel mills, and electricity generators do not usually rely on a single type of fuel. They can easily switch between coal, gas and oil depending on what benefits them the most at a certain point in time. The switch is mainly influenced by the prices of the fuels. These large volume fuel consumers are always on the lookout for low cost solutions. If the cost of another fuel falls, the demand for natural gas is likely to decrease for a certain amount of time, lowering the price. On the other hand, a rise in the price of competing fuels will lead to an increase in the demand and price of natural gas.