In order to effectively use market intelligence to make recommendations to your customers, you must first understand the major fundamentals that affect energy prices. Considering the fact that the majority of U.S. power is generated with natural gas, the two commodities are closely correlated. When natural gas prices go up, electricity prices go up, and vice versa. With that said, you can simply watch the fundamentals of the natural gas markets in order to understand both commodities. Here are the top 6 fundamentals to watch in order to accurately predict the direction of natural gas prices…
Natural Gas Production
Since natural gas is primarily driven by supply and demand, the first major factor affecting the markets is total natural gas production. In 2010, when large amounts of natural gas were found in the Marcellus Shale area, the U.S. markets enjoyed a decade of low natural gas prices. The excess supply introduced to the market helped depress prices. The chart below from the EIA, shows total natural gas production by region for the last fifteen years.
Natural Gas Storage
Natural gas markets have two seasons: injection season and withdrawal season. Since the majority of natural gas consumption is used in the winter months for heating, natural gas is stored the rest of the year so there is enough supply for the winter. April 1 to October 31 is known as injection season when natural gas is pumped into underground storage facilities, and November 1 to March 31 is know as withdrawal season when most natural gas consumption takes place.
Each week, the total amount of natural gas working storage is reported by the EIA. These storage figures have a direct impact on gas prices. When storage is low, traders believe there is not sufficient supply in the market, and prices rise. On the other hand, when storage is high, there is plenty of supply, and prices usually decline. In the chart below, released on Thursday, March 10, 2022, you will notice that working storage is well below the five-year average and close to the five-year minimum. Natural gas prices have recently increased drastically.
DIVERSEGY PRO TIP: Reading the weekly natural gas storage report from the EIA is a great way to stay informed on week-to-week price changes. The weekly natural gas report can be found by clicking this link.
Natural Gas Import-Export Balance
Another primary factor contributing to total natural gas supply figures is the balance between imports and exports to and from the U.S. Over the last decade, the U.S. became the world’s largest producer and exporter of natural gas. In fact, dry natural gas is often liquified and transported via ship to Europe and Asia where natural gas supplies are relatively non-existent. Increased demand from foreign nations on U.S. natural gas contributes to overall demand and strain on domestic supply.
IN THE NEWS: The current Russia-Ukraine conflict could put a heavy strain on U.S. natural gas exports. Europe gets most of its energy from Russia and will most likely rely more on the U.S. if Russian supply dries out as a result of the war. See more here on the energy impacts of the Russia-Ukraine conflict.
Domestic Economic Growth
When the economy is growing, natural gas and electricity are in heavy demand. Many commercial businesses rely on natural gas, and most certainly electricity, in their day-to-day operations. When new businesses are opening, there is an increased demand for energy. This can cause prices to rise in the short term depending on how much supply is available in the market.
Moreover, many industrial facilities rely on natural gas and electricity in their manufacturing process. When the economy is booming and consumer demand is high for products, there is a great strain on energy supply when producing those goods. A growing economy could also cause energy prices to rise.
In the short term, weather is the primary factor that drives demand for gas and electricity. When the weather is cold, people use more natural gas to heat their homes. Furthermore, in the middle of the summer when temperatures are high, electric demand for air conditioning peaks. Below is a chart illustrating the relationship between weather and natural gas prices. In February 2021, Winter Storm Uri brought record cold temps to Texas. The chart below shows the drastic spike in gas prices as the storm descended:
Last but not least, are alternative fuels. Since certain industries, such as manufacturing, industrial and power generation, can switch between fuel sources such as natural gas, coal, and petroleum, when the price of those alternative fuels becomes less expensive they have the option to halt their use of natural gas. On the flip side, when those fuels are high or natural gas prices are low, these facilities turn to natural gas.
DIVERSEGY PRO TIP: After evaluating all of the market-driving factors below, it is best to consider the price of alternative fuels when making conclusions about the future direction of the market. For example, if natural gas production is high, storage is high, weather is mild, and the price of coal is high, it is right to assume that most facilities will rely on nat. gas as a generating fuel. This may or may not drive price considering the amount of supply in the market.