For this week’s blog, I thought I would start off addressing the most talked about topic that seems to be buzzing around lately…GAS PRICES! As a consumer, how awesome has the cheap gas prices been?! Just yesterday, I filled up my entire tank in my car for only $23. I couldn’t help but smile as a drove away feeling like I had won something. Unfortunately on the opposite spectrum, there are a lot of people, businesses, and industries that are hurting from this price drop. That discussion however, is opening another can of worms than what I want to talk about today. So what about natural gas? Have natural gas prices dropped too? Considering there are over 70 million total consumers, I figured this might be something of interest for quite a few people. I want to discuss what affects natural gas prices, if the cheap gas prices have any impact on the price for natural gas, and what to expect in the next few months as far as pricing goes.
What Affects Natural Gas Prices?
You’ll never guess what makes a difference on natural gas pricing. It’s supply and demand, of course! Did memories from your first class of economics just come running back to you? Let’s talk about supply first.
Some of the factors that affect prices on the supply side:
- How much of it is being produced
- Production has been steadily increasing so in turn, prices have been able to stay relatively cheap at less than $4 on average since 2009.
- The amount in underground storage
- When demand for natural gas is at its lowest, during summer months, the levels of storage replenish and increase. So during winter months, when demand for natural gas is at its highest, the gas is still available because of the amount that is able to be stored. In fact, here is an interesting side note…there is about 2,214 Tcf of natural gas that is technically recoverable in the U.S. and the rate of consumption in 2013 was 26 Tcf/year estimating that the U.S. has enough natural gas to last about 85 years.
- The amount being imported or exported
- The majority of the natural gas that is consumed in the U.S. comes from production within its boundaries. In 2013, United States production reached its highest recorded annual total due to more efficient, cost-effective drilling and completion techniques. With the majority of gas coming from inside the United States, this also helps keep the price low.
If supply is increased then prices tend to go down and if supply if decreased, then prices tend to rise. If there is an increase in prices, production is often encouraged.
Factors on the demand side that affect pricing:
- Amount of economic growth
- Economic growth and natural gas markets go hand in hand. If the strength of economy is growing, the demand for goods and services increases generating an increase in demand for natural gas. Especially for industries that use natural gas as plant fuel and feedstock for many products. If the economy is down, the use for natural gas will decline since goods and services also decline.
- Winter and summer weather
- This is a huge playing factor in the demand for natural gas. The weather is sometimes unpredictable making the demand fluctuate at any time. For example, in 2005 hurricanes along the gulf coast resulted in shutting down 4% of total U.S. natural gas production from August 2005 to June 2006. So for this reason, the price can increase because supply is usually unable to act quickly enough to the sudden increase in demand. When a sudden change in weather happens like this, the natural gas that is stored is used to help soften the impact of the quick increase in demand.
- During winter months when it is cold, natural gas is used for heating so the supply for the gas increases, which increases the price.
- During summer months when it is hot, demand increases for natural gas. About 30% of electricity is powered by natural gas so when the sun is pounding and we feel that “Texas heat,” the demand for air conditioning increases which in turn leads to the higher demand for natural gas thus increasing the pricing.
- Petroleum prices
- To avoid the confusion on why petroleum would affect natural gas, it is because petroleum fuels may be an economical substitute for natural gas for some consumers.
If there is a higher demand, then prices will rise. Whereas if there is a low demand, then it will likely lead to lower prices.
Here you can see a chart showing the flow of supply and demand of natural gas from January to October. You can see how the consumption increases during the colder months.
Do the current low gas prices affect natural gas?
Gasoline prices is of course directly related to oil prices. The price of oil has been continuously dropping from $105 per barrel in June to currently $53 per barrel. In the past, the price of natural gas has always gone along with the pricing of oil because natural gas was produced from the same sort of geological formations as oil. Today, natural gas prices move more independent from oil prices due to a technology that makes it easier to produce higher quantities of natural gas from shale formations. Fracking has been able to cut down natural gas prices in the U.S. over the past few years even though the price of oil remained high.
Today, the power sector in the U.S. uses mostly natural gas and coal whereas in the 1970s, they used one in ten barrels of oil. They also have even been shifting from coal to mainly natural gas, “undergoing a cleanup that now will be hard to reverse.” (newrepublic.com) The transition can be linked indirectly to the high cost of oil from the past. So whether natural gas prices rise or fall, it is less likely than ever before that it follows oil prices.
What to expect this winter
I’m not sure if you have noticed or not but it has been abnormally “warm” this winter. If you ask me, it hasn’t been warm at all considering I am a true Texan so anything below 75 degrees is too cold for me. But I can agree that it isn’t as cold as it should be for January. As I stated earlier, the weather has a definite impact on the price of natural gas. Since this winter is predicted to be warmer than average and the natural gas storage is at record highs, the price of natural gas has led to a big drop falling 31% just in the last seven weeks. With having plenty of natural gas at our fingertips and with low demand due to “warm” winter weather, it is no wonder the prices have dropped to severely. Below, you can see a chart showing the significant drop in pricing just in one month.
It is interesting to see the different ways that affect natural gas as far as pricing goes. Being new to the oil and gas industry, as soon as I saw the oil prices drop I thought for sure it would be a direct correlation to natural gas pricing. Regardless of pricing, the use of natural gas is still on the rise so production and getting natural gas to market is as always, very important. Click below to see how CROFT contributes to getting natural gas to market by designing and manufacturing processing equipment that is not only reliable and efficient but eco-friendly as well.
http://www.eia.gov/dnav/ng/ng_cons_num_dcu_nus_a.htm
http://www.eia.gov/tools/faqs/faq.cfm?id=43&t=8
http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_factors_affecting_prices
http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_a.htm
http://www.eia.gov/tools/faqs/faq.cfm?id=58&t=8
http://oil-price.net/dashboard.php?lang=en#COMMODITIES
http://www.newrepublic.com/article/119947/oil-prices-wont-hurt-green-gains
