Figure 11 displays the U.S. average annual natural gas wellhead, city gate, and residential prices (1995-2019). Please note the increasing trend before 2008 and decreasing prices after. In order to fully understand these trends, have a look at Figure 7 (U.S. annual natural gas marketed production) and U.S. GDP from 1995-2019.
In contrast to crude oil, natural gas was almost strictly a domestic North American commodity* whose price is more influenced by weather and the health of the US economy. It is gradually becoming a global commodity in recent years due to increasing LNG export capacity. Other factors, such as the level of US natural gas inventory, impact prices on a weekly basis. While US economic indicators, such as the stock market, employment figures, housing and, manufacturing indexes, are deemed to be indicative of demand for natural gas, global economies and the US dollar do not have much effect on pricing in this country.
Among the major factors influencing US natural gas prices are:
- Weather – over 50% of American homes are heated by natural gas; hot weather leads to more electrical generation for air-conditioning loads, and natural gas represents about 25% of that market. Hurricanes in the Gulf of Mexico disrupt supply as platforms are evacuated ahead of the storms, and the hurricanes can also damage the rigs.
- US economy - as with crude oil, fluctuations in the economy translate into an increase or, decrease, in energy consumption.
- Production levels vs. demand indicators - statistics showing flowing natural gas are compared with demand indicators to determine if the market is "short" or "long" supply. Here are some major indicators.
- Weekly Natural Gas Inventory Report (Energy Information Agency) - every Thursday morning, the US government releases data on the amount of natural gas that is in the nation's underground storage facilities. Injections and withdrawals from storage are also indicative of supply and demand dynamics.
- Baker Hughes Drilling Report of active rigs - the field services company reports weekly on the number of drilling rigs actively pursuing oil and/or natural gas. The change in number and type impact the perception of supply in the future.
- Electrical generation “fuel-switching” - besides the impact of overall demand for electricity, a large amount of the country's power plants that are fueled by coal can actually switch to natural gas, but only if prices are competitive. Also, the Nuclear Regulatory Agency publishes a daily status report for all nuclear plants in the US. When plants are down, more electricity is generated by natural gas.
- Global demand – US LNG reaches most regions of the world. Major economies such as Brazil, China, France, India, Japan, Netherlands are purchasing more and more US LNG. The price of LNG is higher than natural gas exported by pipeline due to costs associated with compression, transportation, and decompression. However, it is still profitable given the increasing worldwide demand for clean energy.
The following video goes into greater detail about the factors which can influence natural gas prices. (The lecture notes can be found in module 2 in Canvas. (Lesson 2: Supply/Demand Fundamentals for Natural Gas & Crude Oil.)
As we explore pricing for crude oil and natural gas in a later lesson, we will consider the major influential factors for each and define their individual impact. We will also have a weekly activity about the market prices for crude oil and natural gas and the factors we believe affect them.
Note: When commodity price is expected to go up, the market is called bullish. In this case, an investor will invest in the commodity. On the other hand, if prices are expected to go down, then it’s called a bearish market. In this situation, an investor is expecting the commodity to lose its value. Consequently, the investor sells the financial commodity.