Why does the spot market price for natural gas fluctuate so much?
Several key factors affect the price of natural gas:
Storage: Natural gas is injected into the pipeline system throughout the Continental United States and delivered to millions of customers all over the country. The majority of natural gas comes from domestic production, with the remaining supplies imported mainly from Canada, and storage facilities located throughout the United States. The domestic production and imported natural gas are enough to satisfy the summer demand, but during the cold winter months additional supplies from Liquefied Natural Gas (LNG) and storage facilities are necessary to fill the increased demand. Therefore, if the stored levels of gas plus the current production do not appear to be adequate to meet the current demand, prices may increase.
Production: The price of natural gas is affected by the volume of natural gas being produced, the cost of finding and producing natural gas, and the costs associated with bringing it to market. When prices are high this tends to encourage exploration and production of natural gas, which results in additional supply coming on market. Increases in supply will catch up to demand and will lead to a drop in prices, over time.
Weather: Forecasts are used as a guideline for the amount of natural gas injected into storage facilities. If the forecasts call for a cold winter, then the level of stored gas should be higher than normal. However, forecasts are usually uncertain and changes to key factors used to establish the levels of storage could significantly affect the market cost of natural gas. Weather forecasts and storage levels are affected by the following:
- Prolonged cold spells or below normal winter weather.
- Supply problems may occur when high cost competing fuels, non-natural gas power generating facilities, switch to natural gas, thus increasing demand.
- Any disruption of the pipeline delivery system or production facilities can affect the availability of delivered gas.