Dynamics of Natural Gas Pricing | Russell T. Rudy Energy LLC
With all the recent attention given to the oil price collapse, relatively little notice has been given to natural gas prices. While international geopolitics exert a major influence on oil prices, natural gas tends to be more domestically focused. As with any market driven price, supply and demand are the ultimate determinants. However, many factors influence both supply and demand.
Recently, I have read several analyses of gas prices. Since prices are perishable information, rather than deal with them per se, I would like to discuss what I perceive as the forces which influence them. While the specific price fluctuations are important to traders, the determinants of price and the effect of prices on other segments of the economy are more important to most of us.
Weather- Weather is the major determinant of domestic natural gas prices. These were buoyed by a cold November, but stalled with an unusually warm first two weeks of December. The weather for the rest of this month will determine if prices find support around the current level of about $3.54/MMBTU (million British Thermal Units), drop further, or start to climb toward $4.25.
Gas Inventories- Last week only 51 billion cubic feet (bcf) were withdrawn from storage due to above normal temperatures. For the same week in 2013 inventories were drawn down by 92 bcf. Currently gas inventories are 3,359 bcf. This is 186 below 2013 levels and 351 below the 5 year average at this point in the year. Lower inventories can result in more rapidly rising prices when the weather turns cold.
Gas Production- Natural gas production is currently about 71.8 bcf per day (bcf/d) which is about 3.2 bcf/d higher than this time last year. With production increasing faster than demand, the potential exists for prices to drop if other factors remain constant.
Crude Oil Prices- The collapse of crude oil prices could lead to cutbacks in oil production, which in turn would lead to reduced casinghead (oil well) gas production. This could lower supply and influence prices upward. However, the drop in oil prices might make previously viable, but less attractive, gas projects look more appealing in relative terms. Drilling these gas prospects could increase supply and exert downward pressure on prices.
Natural Gas Liquids (NGL) Prices- NGL prices have collapsed in tandem with crude prices, which is not unusual. However, with propane bringing less as a liquid, it might be re-injected into natural gas streams, increasing BTU content and thus supply. Longer term, this could lead to operators placing less value on wet gas projects, thereby depressing supply.
Gas Reserves- Domestic natural gas reserves have risen 40% since 2008, largely due to the Marcellus shale in Pennsylvania. However, they have remained relatively flat when compared to 2012 levels. Concurrently, production from these reserves is up 10% from two years ago. This could lead to lower reserves in the future. Given the rapid production decline rates typical of shale gas wells, and the apparent inability of operators to drill new wells without incurring debt, we could be looking at decreasing long term reserves.
Coal Supplies- Indications are that on-site coal inventories at power plants are 20% below levels of a year ago. In those cases where fuel switching is an option, if the weather gets cold, power generators could turn to gas if coal supplies are insufficient. Also, bad weather could compromise already delayed rail deliveries of coal. The shortage of coal, and consequent increased demand for gas, could exert upward pressure on gas prices.
Conclusion- I have not attempted to forecast natural gas prices, but rather, endeavored to explain the factors that can influence them.
