Gas prices are up, but the reasons are complicated. A key factor that must be considered is the current status of natural gas supply in North America, with recent developments in the Appalachian Basin and Canadian tar sands crude oil production being a very good sign for daily and monthly perspectives. Ultimately, much of what drives natural gas prices is the demand for coal or “cleaner” fuels like electricity or solar power. What’s more, policies about natural gas production at both federal and state levels also have a big effect on prices.
This article will explore some of these drivers of supply and demand in natural gas markets to help understand the forecast for future prices. First, though, it will help to put recent developments in context by looking back at the past year to see how natural gas prices have been changing and why.
Annual Natural Gas Prices
Since late March 2018, natural gas prices have been on a clear upward trend. The trend has been driven mainly by transitioning from some of the cheapest winter months for natural gas demand to extremely warm weather in the summer months. Summer 2019 has been shaping up to be one of the hottest summers on record for many parts of North America. For example, as displayed in Figure 1 from NOAA’s National Centers for Environmental Information, the average temperature in June and July was 2°C warmer than normal across most places in the United States. Some areas of the northern Plains have already seen temperatures over 30°C. When it comes to a temperature like that, demand for air conditioning goes up (and so does electricity demand), and that can be a key driver of rising natural gas prices.
When temperatures soar in the summer, there’s always a concern that people will not have enough air conditioning units or they will run them too much and overheat the system. The first scenario can cause people to buy less natural gas and avoid paying higher prices for it, in turn reducing demand for natural gas to keep temperatures down.
Russian gas still flows
Even though the U.S. has been warmer than normal this year, there hasn’t been much of a change in demand for natural gas. However, keep in mind that during the winter and spring, there isn’t a lot of air conditioning and heating equipment purchased. These are typically big purchases made in the years closer to the summer months when buyers have to replace their units before they wear out or break down (think of three-year-old refrigerators). In addition, as many as half of all gas customers tend to use less than 1-gigawatt hour annually (the amount needed to run a standard household during any given year).
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The latter factor means that the effects of high temperatures during the summer are lessened in comparison to winter, at least compared to when natural gas demand is highest. This is due to the overall volatility of daily and monthly demand patterns, which can vary from month to month depending on weather conditions. In other words, swings in demand for natural gas are more difficult to predict considering the seasonal nature of its use.
Natural gas market outlook: Replacement for Russian Gas
With the current weather conditions, a large number of natural gas customers are converting from coal to natural gas again. This isn’t surprising when prices are low and electricity demand is high (as it is now). Other factors that have increased the conversion rate include the planned closure of many coal-fired power plants in the U.S. and Canada where several units have already been shut down due to regulatory requirements or their owners doing so voluntarily (this is part of an overall trend toward cleaner forms of energy).
In addition, buildings that have been built in the last 15 years or so typically use other sources of energy such as electricity and natural gas for heating as well as air conditioning during the summer.
