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Natural gas prices |
Natural gas prices, as with other commodity prices, are driven by supply and demand fundamentals.
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The demand for Natural Gas is mainly driven by the following factors:
| 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 conditions can have a major impact on natural gas demand and supply. Cold temperatures in the winter increase the demand for space heating with natural gas in commercial and residential buildings. Alternatively, hot temperatures in the summer increase the demand for space cooling with air conditioning, which also increase the demand for natural gas at electrical utilities because the utilities provide the electric power that fuels most residential air conditioners.
Natural gas demand usually peaks during the coldest months of the year (December-February) and is lowest during the "shoulder" months (May-June and September-October). During the warmest summer months (July-August), demand increases again. Due to the shift in population in the United States toward the sun belt, summer demand for natural gas is rising faster than winter demand.
Temperature impacts are measured in terms of 'heating degree days' (HDD) during the winter, and 'cooling degree days'(CDD) during the summer. HDDs are calculated by subtracting the average temperature for a day from 65 degrees. Thus, if the average temperature for a day is 50 degrees, there are 15 HDDs. If the average temperature is above 65 degrees, HDD is zero.
Cooling degree days are also measured by the difference between the average temperature and 65 degrees. Thus, if the average temperature is 80 degrees, there are 15 CDDs. If the average temperature is below 65 degrees, CDD is zero.
Hurricanes can impact both the supply of and demand for natural gas. For example, as hurricanes approach the Gulf of Mexico, offshore natural gas platforms are shut down as workers evacuate, thereby shutting in production. In addition, hurricanes can also cause severe destruction to offshore (and onshore) production facilities. For example, Hurricane Katrina (2005) resulted in massive shut-ins of natural gas production.
Hurricane damage can also reduce natural gas demand. The destruction of power lines interrupting electricity produced by natural gas can result in significant reduction in demand for a given area (e.g., Florida).
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.
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 percent2.
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) do not 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.
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 is 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 is greater supply flexibility and prices will tend to drop.
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.
The supply for Natural Gas is mainly driven by the following factors:
| 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 |
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 119×109 cu ft (3.4×109 m3) 4. However, natural gas pipeline companies should continue to expand the pipeline infrastructure in order to meet growing future demand.
As natural gas injections (positive) represent additional demand, withdrawals (negative) represent an additional source of supply which can be accessed quickly.
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 drilling for natural gas. The increased supply will then lead to decrease the pricing.
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.
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 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.
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.6 7 8 9 10
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.11 12 Total U.S. natural gas reserves were then estimated at 30 to 50 trillion cubic meters, or about 40 to 70 years consumption.13
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