NGA ISSUE BRIEF: Natural Gas Price Trends

January 2021

Key Points
  • Natural gas commodity prices have been steady in recent years, in great measure due to strong domestic production and a positive supply balance.
  • U.S. EIA projects commodity prices to stay relatively steady over its short-term outlook period - at a Henry Hub national average benchmark of $3.01/MMBtu in 2021.
  • Lower prices have been positive for consumers, from homeowners to businesses.
  • Spot market prices in the Northeast can be extremely volatile during high demand periods (such as the winter), reflecting high demand and infrastructure constraints.
  • It should be added that natural gas utility "firm" customers, such as residential heating consumers, are to a great extent protected from these market price swings due to utility planning and supply portfolio management.

The trend in natural gas commodity prices in the U.S. has been toward lower and more stable prices, as the country has experienced high domestic production, especially since 2008 and the rise of shale gas production.

The key variables in natural gas price formation generally include production levels, demand growth, the state of the economy, storage levels, weather, and alternate fuel prices.

The outlook as of early 2021 is for natural gas commodity prices to remain relatively steady, with the uncertainty of the impacts of the COVID-19 pandemic as a wildcard. In its January "Short-Term Energy Outlook," the U.S. Energy Information Administration (EIA) said it expects the Henry Hub price, which averaged $2.05 per MMBtu in 2020, to be $3.01 per MMBtu in 2021.

Natural gas prices in 2020 at the national benchmark, the Henry Hub, were "the lowest annual average price in decades," noted EIA in January 2021. However, reduced production in the wake of the economic slowdown is projected to lead to higher spot prices this year.

EIA also noted in October 2020, in its updated annual "Winter Fuels Outlook", that natural gas is projected to be the lowest cost home heating energy source in the Northeast this upcoming winter (see chart below).

Chart: U.S. EIA, January 2021

It is projected that the natural gas price bandwidth will stay relatively moderate over the coming years, given the size of the domestic supply resource base.

As noted, short-term volatility reflecting delivery constraints during periods of high demand and cold weather do occur, especially in regional markets. The Northeast region, for instance, remains among the most price-sensitive markets in the country, reflecting its pipeline constraints.

Utilities have in place long-term supply and storage arrangements, and their "firm rate" customers, such as residential heating customers, are to a great extent protected from spot market fluctuations. As the U.S. EIA has observed: "Residential customers see less [price] variation because their bills reflect monthly average prices, which do not fluctuate as much as daily prices. Also, many residential customers stabilize their monthly bills by participating in yearly budget plans provided by their local gas distribution companies."

EIA notes that for New England and New York, "Pipeline constraints still exist in the area, and day-to-day price volatility is likely." Spot market volatility is most prone to impact "non-firm" or interruptible customers, with particular impacts on the power sector in the region, and thus ultimately electric customers. The Northeast region - a high-demand region but one characterized by pipeline infrastructure constraints - has experienced periods of the highest gas and power spot price volatility in the U.S. over several recent winters - in 2013/14, 2014/15, and 2017/18.

Daily Energy Prices, U.S. Energy Information Administration (EIA)

Natural Gas Price page, U.S. EIA