Natural Gas Futures Prices: Near and Far Influences

Some speculators rely on technical calculations that chart the rise and fall of commodities prices.   Others follow the fundamentals—the real-world variables that affect pricing.   It doesn’t hurt to know something about both.   Using natural gas futures prices as an example, it's evident that the technical analysis is similar for all investments but the fundamentals are not. 

Natural gas futures contracts have been historically priced on a strongly regional basis, as natural gas prices themselves have varied significantly from region to region.   This is because many of the factors influencing them are local in nature, but some are national and, increasingly, some are global.   So what really makes natural gas prices go up and down?

(Disclaimer: Seasonal factors of supply and demand are typically built into futures prices.)

• Weather
  Natural gas futures speculators keep a very close eye on the weather.   Mild weather decreases demand and drives prices down.   Extreme weather, especially extreme cold, drives demand and prices up.   Even short-term weather patterns can create price spikes, because supplies cannot adjust quickly to increases in demand. 
  

• Hurricane fears
  Although most weather factors affect the demand dynamic, hurricanes can impact supply by disrupting service.   One third of the U.  S.   production of natural gas takes place in two hurricane-prone states—Louisiana and Texas.   Concerns about an active hurricane season can drive prices up.

• Slack economic activity
  When an economy slows, the industrial demand for natural gas lessens.  

• Price of oil
  Natural gas prices are historically correlated with oil prices.   There are two factors at work here.   One is fuel competition: many industrial and transport end-users can switch between oil and natural gas as supplies and price fluctuate.   Also, natural gas and oil are often found in the same geological formations so the oil exploration that is encouraged by a rise in oil prices typically results in more exploration and production in natural gas as well.

• Drilling activity 
  This is directly connected to price changes in a predictable pattern.   When gas prices drop, producers have less incentive to spend money on drilling and the number of online rigs declines, which eventually reduces supply and supports a price rebound.
  

• Storage levels
  These are very important in pricing.   High storage levels can mitigate price spikes due to other factors and low storage levels can signal potential supply problems and trigger higher prices. 

• Ethanol debate
  Global ethanol mandates have driven up demand for the grain-based fuel which is distilled using gas-fired boilers.   Ironically, our search for renewable resources has increased the pressure on this non-renewable commodity. 

• Canadian reserve levels
  Canada is currently our predominate trading partner for natural gas imports, but Canada’s reserve levels are dropping.   If we need to increase imports from overseas locations like Russia and the Middle East, prices are likely to rise for two reasons.   One is the additional cost of converting and moving LNG (liquefied natural gas, or gas chilled to liquid form for transportation by ship).   The other is the increased potential for political disruption of supply lines.

• LNG-driven globalization
  We’re seeing an explosive expansion in the development of liquefied natural gas plants worldwide.   This more widely distributable format will undoubtedly make natural gas a more globalized commodity.   Increasing globalization will increase the influence of geopolitical factors, introducing new sources of volatility.  

• China
  With increasing globalization, the demands of other consuming regions around the world will increasingly affect our domestic supply and pricing.   China, that fast-growing economic dragon, has pledged to decrease its dependence on coal by boosting its consumption of natural gas significantly during the next decade. 

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