Supply and Demand of Natural Gas

Supply and Demand of Natural Gas

Gas is often the price-setting resource because prices have recently dropped and power generation relies on several different fuel sources. Therefore, the many factors that drive gas prices have downstream effects on electricity supply, demand and pricing. Shifts in factors listed below can also happen simultaneously, making it challenging to forecast market shifts.

Imports: Areas that consume natural gas but do not produce it, or do not produce enough of it, must import it from other areas using the available pipeline infrastructure. Demand from imports can create market competition in an area that produces and uses their own domestic source of natural gas.

Exports and Liquefied Natural Gas: If gas prices are high enough to justify exporting overseas, producers may choose to tap into new global markets. These markets (new demand) add competition for domestic customers, increasing prices. For example, liquefied natural gas (LNG) is produced by converting natural gas to a liquid. LNG is easier and safer to store and cost-effective to transport across long distances (such as overseas) where pipelines do not exist. Although LNG production facilities can be costly, global demand and higher prices are incentives for gas producers to convert the commodity. Because the United States just began exporting LNG in 2016, even a very small increase in LNG production and exports represents a large year-over-year change.2 Though LNG is currently a modest export for the United States, analysts expect it to grow dramatically over the next several years.3

Infrastructure Constraints: Natural gas is transported using an infrastructure of pipelines. The pipeline network extends across the country like an interstate highway system, taking natural gas from drilling sites to your home or business. When new production sites are built, the necessary pipeline network may not be available in that area to deliver supply to customers. Constructing new pipelines requires regulatory compliance and a great deal of planning. But lack of infrastructure to deliver supply and debates about whether and where natural gas pipelines are located can lead to reactionary price volatility.

Technical Trading: Like many commodities, a large quantity of managed money is invested in natural gas stocks. When traders see indicators of price volatility based on their calculations and market patterns, they may cash in on a strategy to buy or sell. Movements made by large investment groups all at one time can push market prices very easily.

Like any openly traded commodities market, the web of factors affecting energy pricing is complex. However, the shifting conditions are also a source of opportunity for you. The keys to developing a successful energy strategy lie in your knowledge of the choices open to you and your choice of a supplier who can offer you reliable service and good advice.