As a commodity that is publically traded, there are several factors that affect the price of natural gas. Specifically, these factors can be categorized into the same forces that drive any commodity market: supply and demand.
Weather is one of the largest factors that affect the price of natural gas. Since over 50% of homes in the United States use natural gas for heating during cold winter months, the price of natural gas is often affected by this demand factor.
Conversely, winter isn’t the only season that affects the price of natural gas. Since many power plants use natural gas a fuel, especially in times of peak demand when it is easy to fire up plants with natural gas, hot summer months can also spur demand for natural gas and affect its price.
Natural gas futures can be very reactionary to weather forecasts, models, and patterns. Natural gas traders often use temperature anomaly weather maps to determine temperatures in areas relative to their normal seasonal temperatures. For example, temperatures below their normal seasonal levels indicate the potential for strong heating demand.
98% of the natural gas consumed in the United States is produced in North America, primarily in the United States and Canada. With an estimated 2,384 trillion cubic of feet of natural gas in the United States alone (as of 2013) and an approximate use of only 24 trillion cubic feet of natural gas per year, there is likely to be no shortage of supply for years to come. Moreover, natural gas is still being discovered such as in the Utica Shale area which, according to early estimates, has the potential to possess the largest shale gas in the United States.
However, natural gas must still be produced from these potential supplies. There are a variety of factors that affect this supply side of natural gas. For example, weather can actually affect supply as wellheads can freeze-off when temperatures fall below freezing in the producing fields. Water and other liquids freeze when wellheads are unprotected, blocking the flow of gas.
Another production factor is the number of gas producing rigs in operation. Baker Hughes releases a rig count report each week which details the number and change of operational U.S. oil and gas rigs in the United States, Canada, and internationally. It is important to note that many oil rigs also drill for natural gas, so any change in oil rigs can also affect the supply and production of natural gas.
Storage levels, which refer to the amount of gas stored underground or in above ground storage containers, are another determining factor in the price of natural gas. Specifically, natural gas held in storage is an important metric that shows the United States’ ability to meet peak demand.
In the U.S., there are two important seasons for natural gas: the injection season and the withdrawal season. The injection season – the period when the injection of natural gas into storage is greater than its withdrawal – usually occurs from April to November of each year. The withdrawal season – the period when the withdrawal of natural gas from storage is greater than injection from producers – usually occurs from November to April of each year.
The U.S. Energy Information Administration (EIA) releases a Weekly Natural Gas Storage report on Thursdays at 10:30am EST. The report’s primary number of interest is its net change (indicated in billions of cubic feet) for the weekly reporting period. A negative number indicates a withdrawal from storage; a positive number indicates an injection. The report is preceded by estimates from industry experts in which a consensus estimate of the withdrawal or injection is released. The price of natural gas often reacts strongly based on the difference, if any, from the actual net change and the consensus estimates.
The EIA’s Weekly Natural Gas Storage report also indicates the storage levels in comparison to the five-year benchmark level and levels from one year prior. These are additional metrics that affect the price of natural gas.
While technical levels play a smaller role in the price of natural gas than weather, production, and storage, natural gas does have technical levels based on historical price action that can act as support and resistance for the price of natural gas. These technical levels are important areas to consider when investing and trading in natural gas.
The demand for natural gas is expected to continue to increase as a push for low-carbon fuels continues to support a cleaner environment. Specifically, natural gas plants are cleaner, more efficient, and are inexpensive relative to other sources of energy. Of the three fossil fuels (oil, coal, and natural gas), natural gas releases the least amount of carbon dioxide per unit of fuel (30% less than oil and 45% less than coal).
All commodities are subject to the external forces of the larger economy. When the economy is improving, there is an increased demand for goods and services. Many of these goods and services include manufacturing and raw materials which all use natural gas. At the same time, in periods of decreased growth, there is a decrease in demand for these goods and services, leading to lower prices for natural gas.
There are several unforeseen factors that have historically affected the price of natural gas. These factors include natural disasters, natural gas pipeline breaks, natural gas explosions, and other infrastructure problems.
Ultimately, there are numerous factors that affect the price of natural gas. Traders and investors must follow each these factors closely in order to effectively profit from this commodity.