Tuesday, October 23, 2007

Natural Gas – II

Here’s a little more detail on the factors that effect natural gas prices.

The demand for natural gas usually peaks sometime between November and March. This of course depends on how cold the temperature gets as natural gas is the main input for heating North American homes. Likewise, the demand for natural gas increases in the summer when everyone starts turning on their air conditioners. The price of natural gas is also influenced by catastrophic weather events ie- hurricanes. If you’ve ever watched your local weather forecast you know that the weather can’t be accurately predicted (especially the long term forecast) so although we know that weather affects the price of natural gas we can’t predict when. However, it is safe to assume that at some point there will be either a vicious hot/cold snap or major hurricane and gas prices will spike (which is when they should be dumped)

Well this one is obvious...the more people that need to heat/cool their house the greater the demand for natural gas.

Economic Growth
Industrial and commercial enterprises use a huge amount of electricity (which is largely generated with natural gas). When the economy is flourishing the demand for goods increases and therefore the manufacturing of goods increases which increases the amount of electricity used. The opposite occurs during a recession. As an example during the small recession in 2001 the industrial demand for natural gas fell by 6%.

Fuel Competition
This basically refers to the ability of large industrial users of natural gas to change fuels if the price of natural gas gets too high. For example, some power plants can change from gas to coal and vise versa if the price of either commodity gets too high. This will decrease demand of the commodity and therefore reduce the price of that commodity.

The amount of gas in storage obviously affects the price…the more gas in storage the lower the price, the less gas in storage the higher the price. This is a simple principle of supply and demand, if there is lots of gas in storage there is a limited threat of a supply crunch.

If natural gas is cooled to -260F at normal pressures it become a liquid know as LNG and takes up 1 six-hundredth of the volume that it does in it’s gaseous state. LNG is really the only economically viable way to ship natural gas internationally and currently only accounts for about 1% of the natural gas used in the United States. However, as technology advances this number is certain to climb which will cause natural gas to be priced based on global demand (as most commodities are) instead of continental demand.