NGA ISSUE BRIEF: Natural Gas Price Trends |
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March 2012
SUMMARY
The key variables in natural gas price formation generally include demand growth, the state of the economy, production levels, storage levels, weather, and alternate fuel prices. The last few years have seen variable commodity price volatility for many energy forms, including natural gas. In early July 2008, natural gas reached $13.50/MMBtu while oil hovered close to $150 a barrel. As of January 2012, however, the Henry Hub natural gas price was below $3.00/MMBtu, while oil remained above $100. The change has been dramatic, and very positive for natural gas. The outlook as of early 2012 is for natural gas prices to remain steady and relatively low. In its January 2012 "Short-Term Energy Outlook," the U.S. Energy Information Administration (EIA) noted: "The current forecast for 2012 natural gas prices is significantly lower than at this time last year, as continued growth in production and a very warm start to the winter have contributed to record-high natural gas inventories. EIA now expects the Henry Hub spot price will average $3.53 per MMBTU in 2012. In 2013, the forecast spot price rises to an average of $4.14 per MMBtu."
This significant shift in the commodity pricing paradigm reflects the wave of new domestic natural gas supplies entering the U.S. market, as well as lower demand during a prolonged economic slowdown. U.S. production rose 7.4% in 2011, which was, according to EIA, “the largest year-over-year volumetric increase in history.” The outlook is positive for continued strong domestic production. EIA noted in January 2012 that "prices at the Henry Hub, a key benchmark location for pricing throughout the United States, fell 9% to about $4 per million British thermal units in 2011, the second lowest annual average price since 2002." For the Northeast region, EIA added: "The Northeast had the highest average natural gas prices in 2011—slightly over $5 per MMBtu—due to on-going pipeline constraints, especially during extremely cold or hot weather. Nevertheless, Northeast prices fell on average about 5-7% in 2011. Price spikes in Boston and New York were generally cold-weather related, but the hot summer played a role in high July prices."
As noted above, the long-time linkage between natural gas and oil prices appears severed, and the variance between natural gas and oil prices has been widening, with natural gas falling substantially below oil prices. Adding new infrastructure in the Northeast, along with the increased supply availability, should also serve to narrow the basis differential between the Northeast market and the traditional market hubs. For Further Information U.S. Energy Information Administration (EIA) U.S. Federal Energy Regulatory Commission (FERC) |
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