Factors Relating to Natural Gas Markets
Factors on the supply side that may affect prices include variations in natural gas production, net imports, or storage levels. Increases in supply tend to pull prices down, while decreases in supply tend to push prices up.
Factors on the demand side include economic growth, winter and summer weather, and oil prices. Higher demand tends to lead to higher prices, while lower demand can lead to lower prices.
1) Domestic Supply and Prices Can Be Cyclical
Most of the natural gas consumed in the United States comes from domestic production. Lower production can lead to higher prices, but those higher prices, in turn, can lead to increased drilling for natural gas and eventually increased production.
Beginning in the second half of 2008, natural gas prices declined significantly with the economic downturn and a decline in natural gas consumption. These lower prices were accompanied by a steep decline in the number of drilling rigs drilling for gas. That erosion of drilling activity, combined with production cutbacks in response to current and projected low demand, are expected to lead to a drop in natural gas production. As economic recovery leads to increasing demand for natural gas in the industrial sector, natural gas prices are expected to rise again.
2) Severe Weather Can Disrupt Production
Hurricanes and other severe weather can affect the supply of natural gas. For example, in the summer of 2005, hurricanes along the U.S. Gulf Coast caused the equivalent of about 4% of U.S. total production to be shut in between August 2005 and June 2006.
3) Pipeline Imports from Canada Are the Second Largest Source of Supply
In 2008, pipeline imports amounted to almost 16% of total natural gas consumption. About 99% of the pipeline-imported natural gas came from Canada with the remainder from Mexico. U.S. pipeline imports are expected to decline in 2009 because of a robust U.S. production, especially relative to demand that has been reduced by the current economic downturn. Canadian production is also expected to decline reflecting both a slowdown in drilling for gas and declining productivity of existing gas wells in Canada.
4) Liquefied Natural Gas (LNG) Imports May Increase
In 2008, LNG imports totaled 352 billion cubic feet or about 2% of total natural gas consumption, most from Trinidad and Tobago. U.S. LNG imports are projected to rise in 2009. Increasing world LNG export capacity, along with expected weak natural gas demand and limited natural gas storage capacity in Asia and Europe are expected to increase the availability of LNG for the United States.
5) Strong Economic Growth Can Drive Up Natural Gas Demand and Prices
Economic activity is a major factor influencing natural gas markets. When the economy improves, the increased demand for goods and services from the commercial and industrial sectors generates an increase in natural gas demand. This is particularly true in the industrial sector, which is the leading consumer of natural gas as both a plant fuel and as a feedstock for many products such as fertilizer and pharmaceuticals.
6) Winter Weather Strongly Influences Residential and Commercial Demand
During cold months, residential and commercial end users consume natural gas for heating, which places upward pressure on prices. If unexpected or severe weather occurs, the effect on prices intensifies because supply is often unable to react quickly to the short-term increased level of demand. These effects of weather on natural gas prices may be exacerbated if the natural gas transportation system is operating at full capacity. Under these conditions, prices must increase enough to reduce the overall demand for natural gas.
7) Hot Summer Weather Can Increase Power Plant Demand for Gas
Temperatures also can have an effect on prices in the cooling season as many electric power plants that are operated to meet air conditioning needs in the summer are fueled by natural gas. Hotter-than-normal temperatures can increase gas demand and push up prices.
8) NG Supplies Held in Storage Play a Key Role in Meeting Peak Demand
The overall supply picture is also influenced by the level of gas held in underground storage fields. Natural gas in storage is a critical supply component during the heating season that helps satisfy sudden shifts in supply and demand, accommodates stable production rates, and supports pipeline operations and hub services. Levels of natural gas in storage typically increase during the refill season (April through October), when demand for natural gas is low, and decrease during the heating season (November through March), when space heating demand for natural gas is high. Natural gas in storage represents an incremental source of supply immediately available to the market, which can ameliorate the effects of increased demand for natural gas, or other supply disruptions, on prices.
9) Oil Prices Can Influence Natural Gas Prices
Some large-volume gas consumers (primarily industrial consumers and electricity generators) can switch between natural gas and oil, depending on the prices of each. Natural gas and coal markets can also interact when the price of natural gas falls significantly. Electricity generation using natural gas can even become attractive relative to coal-fired electricity generation in some areas of the Country. Because of this interrelation between fuel markets, when oil prices fall, the shift in demand from natural gas to oil pulls gas prices downward. When oil prices rise relative to natural gas prices, there may be switching from oil to natural gas, pushing gas prices upward.