July 12, 2023
Written By
Trellis Team
The market price for natural gas impacts everyone, playing a primary role in power generation, fueling industrial processes, and as a precursor for chemicals, plastics, and pharmaceuticals.
Since you’re reading this blog, you likely have even more reason to care than the average member of society.
Like us, you probably have a natural gas price ticker somewhere on your desktop, browser, or mobile phone—and perhaps all three.
So, what drives the price of natural gas?
Can you name the main factors that send the price chart zigging up and zagging down on a short- or long-term basis?
We’ll give you the first one for free: supply and demand.
The fundamental economic principles of supply and demand inevitably weigh heavily on the price of natural gas. If demand outpaces supply, prices will rise. If supply outpaces demand, prices will fall.
What else?
The price of natural gas is inextricably linked to weather conditions, particularly in parts of the country that experience extreme seasonal temperatures.
Cold winter weather leads to increased demand for gas-fired heating and can cause freeze-offs that curtail supply.
Hot summers drive large swings in electricity demand as air conditioners battle to keep buildings cool, much of which is met by natural gas-fired power plants.
The state of the economy exerts a strong, longer-term influence.
When the economy is strong, industries and consumers use more natural gas, supporting demand.
Meanwhile, gas producers become more attractive to investors and are incentivized to drill new wells, growing supply—albeit at a few months’ lag to the increase in demand.
During economic downturns, the demand for natural gas falls. Production takes longer to slow down as producers release rigs and scale back their operations, leading to an oversupply that depresses prices.
The amount of natural gas held in underground storage acts to buffer the price.
When demand outstrips supply, gas is drawn from storage to make up the shortfall.
When supply exceeds demand, gas can be pumped into storage for future use.
If storage levels are below their long-term average—especially ahead of high-demand seasons (like winter)—the gas price increases.
Conversely, if storage levels are higher than normal, the price can fall.
The availability and condition of infrastructure, such as pipelines and LNG terminals, has both short- and long-term effects on the price of natural gas.
Interruptions to pipeline service caused by equipment outages, planned maintenance, accidents, or even a cybersecurity incident can limit the network’s ability to move gas from source to consumer.
In the longer term, political and environmental disputes that prevent expansion or modification of natural gas infrastructure can constrain the regional supply of natural gas and lead to locally increased prices.
Federal and local government policy, legislation, and regulations all influence the price of gas by restricting gas well drilling and pipeline construction, and by imposing additional costs (usually in the form of taxes) that affect the attractiveness of supply and distribution investments.
Longer-range policies, such as those providing subsidies to renewable energy development, discourage investors from backing natural gas developments and power generation projects.
This makes capital harder and more expensive for developers to obtain, ultimately increasing the price of the natural gas they deliver.
With U.S. LNG export capacity forecast to reach 20 bcf/day in 2026—significantly greater than any other country—the domestic price of natural gas is more heavily influenced by geopolitical factors than ever before.
Disruptions to European gas supply, which have sent prices there into the stratosphere, have created a strong draw on LNG cargoes. This incentivizes U.S. LNG exports, which drives up demand and domestic prices.
Other geopolitical factors that can play a role include trade agreements, import or export tariffs, and the overall macroeconomic picture, which drives global gas supply and demand.
Technological innovations that make it cheaper and more efficient to find, extract, process, and distribute natural gas make supply more plentiful, pushing prices lower.
Similarly, innovations that create new demand for gas as a fuel or precursor—or make it advantageous to switch away from other sources, such as coal or oil—can carry prices higher.
At a more nuanced level, technologies that improve the efficiency of the entire value chain—including software, connected devices (Internet of Things), and artificial intelligence—perturb the status quo and can impact price.
Okay, that’s a bit harsh, but speculation by traders in the natural gas futures markets can have a huge impact on prices.
Whether traders believe the price of natural gas is going to rise or fall, causing them to hold correspondingly long or short positions, they steer future gas prices based on their predictions of how the factors on this list will unfold and combine.
Given the long-established difficulties inherent in forecasting many—if not all—of the factors we’ve discussed, it’s no surprise that the market can be volatile!
One of the factors on this list is usually dominating the headlines and, correspondingly, enjoying its moment in the natural gas price spotlight.
But all of them are always in play—and in a state of flux.
The weather constantly changes and has proven vexingly difficult to predict.
Economists bicker disagreeably about overheating, recession, hard-or-soft landings, stimulus, easing, and all manner of junior statistics.
Incidents and accidents create short-term headaches (and opportunity) for gas traders and schedulers.
Governments, corporations, and myriad other stakeholders push, pull, and prod the industry to comply with their objectives and agendas.
People all along the value chain spend their lives trying to understand and predict these factors, and to make money handling one of the world’s most important commodities.
Hopefully they’re using something more sophisticated than a spreadsheet to keep everything in focus and under control.
If not, Trellis Energy is here to help.
Tags: Natural Gas
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