What Drives Supply and Demand of Natural Gas
It’s common knowledge that supply and demand are the biggest drivers of natural gas and electricity pricing. When the demand for natural gas exceeds the supply, prices go up accordingly.
For most consumers, the only real insight they get into the energy market is when they receive their monthly gas bill. However, it’s important for brokers to understand the factors driving these prices.
This will allow you to anticipate future market trends and advise your customers accordingly. Keep reading to learn about what drives the supply and demand for natural gas.
Factors that Affect Natural Gas Supply
The United States produces most of the natural gas that it consumes. Annual U.S. dry natural gas production typically increased between 2005 and 2019, and U.S. natural gas prices have generally fallen year-over-year and have been less volatile since 2010. The supply of natural gas is tracked weekly by the Energy Information Administration (EIA). When the surplus is high, natural gas prices drop. However, when production begins to lag, it doesn’t take much to draw on this surplus and drive prices back up.
The level of natural gas in underground storage fields has a big effect on the overall supply. When demand is lower, reserves will absorb excess domestic supply. Storage also supports pipeline operations and transaction center services. Natural gas levels in storage typically increase between April and October, when overall demand for natural gas is lower. However, in recent years, injections of natural gas into storage have often continued into the first half of November. Levels of natural gas in storage typically decrease from November through March, when demand for natural gas for heating is generally high.
Imports & Exports
Stockpiling helps meet seasonal demand and spikes, which domestic production and imports may not be able to meet. Although most of the natural gas consumed in the United States is produced in the United States, the United States imports some natural gas to help supply domestic demand. In 2020, U.S. natural gas exports reached a record high, and the United States was a net exporter of natural gas for the fourth year in a row.
Factors that Affect Natural Gas Demand
The short-term demand for natural gas is primarily affected by weather. Above or below average temperatures tend to spike a high demand for natural gas. Natural gas supply cycles are based on this seasonal demand. These cycles are commonly known as the shoulder months of spring and autumn or peak demand months of summer and winter.
- Extreme Weather
Hurricanes and other extreme weather events can affect natural gas supplies. Natural gas prices have been impacted when hurricanes disrupted natural gas production in the Gulf of Mexico, such as 2005 with hurricanes Katrina and Rita. In recent years, production disruptions in the Gulf of Mexico have tended to have less of an impact on prices than in the past, as the share of total U.S. dry natural gas production in the Gulf of Mexico has fallen from about 25% in 2001 to 2% by 2020. Extreme cold conditions can also disrupt natural gas production. If these supply disruptions occur when demand for natural gas is high, prices could rise more than expected.
- Summer Weather
High summer temperatures can directly and indirectly affect natural gas prices. Hot weather tends to increase the demand for air conditioning in homes and buildings, which in general increases the power industry’s demand for natural gas. During periods of high demand, spot market prices for natural gas can rise sharply if supplies of natural gas are relatively weak or limited. In addition, an increase in natural gas consumption by the power sector during the summer could lead to lower-than-normal pumping of natural gas into storage and a decrease in winter storage volumes, which could affect prices.
- Winter Weather
During the cold months, demand for natural gas to heat spaces by residential and commercial consumers often increases overall demand for natural gas and can put upward pressure on prices. In the event of unexpected cold or extreme weather, the impact on prices can increase as supply often cannot respond quickly to an increase in demand in the short term. The effect of weather on natural gas prices may be greater if the natural gas transmission system (pipeline) is already operating at or near capacity. Stockpiled natural gas supplies can help cushion the impact of high demand in cold weather.
The strength of the economy affects the natural gas market as well. During periods of economic growth, increased demand for goods and services from the commercial and industrial sectors can lead to increased natural gas consumption. The increase in economically related consumption can be especially strong in the industrial sector, which uses natural gas as a fuel and as a feedstock to make many products including fertilizers and pharmaceuticals.
Some large fuel consumers, such as power plants, iron, steel, and paper mills, can switch between natural gas, coal, and oil, depending on the cost of each. fuel. As the cost of other fuels decreases, the demand for natural gas may decrease, which can reduce the price of natural gas. As the price of competing fuels rises relative to the price of natural gas, converting those fuels to natural gas can increase the demand and price of natural gas. However, the fuel convertibility of U.S. manufacturing industries has declined over the past few decades. Favorable natural gas prices in recent years have contributed to the increased use of natural gas by the power sector.
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