Back to Fundamentals: Understanding the factors that impact natural gas prices

Back to Fundamentals

Understanding the factors that impact natural gas prices

In 2021, the U.S. commercial sector consumed 3,263,722 million cubic feet (MMcf) of natural gas, with about 1.6% of that in Georgia alone. The hospitality market relies on natural gas for heating, cooking and drying. It’s been the steady choice for businesses because it’s reliable and effective. But recent price increases have made natural gas management more complex than ever before.  

It’s no secret that natural gas prices have been exceptionally volatile in 2022. It’s normal for prices to fluctuate, but the natural gas market hadn’t seen prices reach such spectacular highs since 2008. From 2017-2021, natural gas prices averaged below $3—but in early 2022, prices hit $8.14/MMBtu (according to the U.S. Energy Information Administration).

Fortunately, prices are forecasted to drop in the coming year. Still, as we’ve come to experience, nothing is set in stone. So, what factors influence natural gas prices, and is there any way to prepare for future volatility?

Let’s take a look at the fundamentals. Like most things bought and sold in high volume, it all comes down to Economics 101—supply and demand.

With demand, the weather usually plays the most significant role. People buy more natural gas when it’s cold out to help heat their homes and businesses. Typically, demand for natural gas is lowest from April to October and highest during what we call heating season—November through March. But other factors such as economic activity (which slowed during the COVID-19 pandemic) and the cost of competing energy sources play roles, too.

With supply, considerations include production levels, storage amount and the country’s import/export activity. The United States produces most of the natural gas that it consumes. From 2005-2019, production generally increased, which led to lower prices and less volatility. In the first half of this year, the U.S. produced 3.1MMcf of natural gas monthly, higher than last year.

Any gas that isn’t immediately sent to market is injected into storage facilities. From storage, the gas is either delivered to the customer or reserved for supply management and backup inventory. Some companies can also move gas in and out of storage through futures trading.

Current storage levels are below the five-year average, and the gap won’t close without consistently strong injection rates. Because of record-high temperatures and a shift away from coal-fired generation, natural gas consumption may increase in the electric power sector during the summer months. That could mean fewer than normal injections, lower storage volumes for winter and higher prices.

Finally, natural gas import and export activity affects domestic supply. Over the past three years, export capacity has increased by more than 40%. In the first half of 2022, the U.S. became the world’s largest LNG exporter (LNG stands for liquified natural gas, the state in which natural gas can be stored and shipped). This new distinction could be due to the war in Ukraine and limitations on Russian imports. And although LNG exports decreased when the Freeport LNG plant shut down operations, the company recently announced that they’d resume activity in early October.

Of course, these are just the basics. To truly make the most out of your natural gas consumption, it always helps to have experts on your side.

At Gas South, we provide many customers with dedicated account managers who understand the natural gas market and your business needs. We’re committed to finding creative ways to keep your costs down and your business running smoothly. To provide customers with additional information and insights, we release a monthly update on the natural gas market and conduct interactive webinars to dive deeper into the market forecast.

If you’re interested in working with Gas South to manage your natural gas needs, reach out to Director of Commercial Acquisitions Topher Jensen at Sales@GasSouth.com.