What Factors Affect Natural Gas Prices?

What Factors Affect Natural Gas Prices?

Before we discuss factors that affect natural gas prices, let’s talk about what makes up natural gas prices in the first place. According to the U.S. Energy Information Administration, two main components make up natural gas prices, and these prices will always include various taxes and fees:

1. Commodity cost.

This is the actual cost of the natural gas itself, either at the production stage at the source, at a market trading hub, or under a contract from marketers or utilities.

2. Distribution and transmission costs.

Natural gas prices are affected by how much or far it has to be transported from the source. After purchase, natural gas is moved by pipeline from the place where it’s produced or stored to your local distribution utility. The cost to deliver it from there to you the consumer is included, and all of these prices are affected by many variables such as distance, politics, and the labor market.

These two cost components combined can vary according to many natural gas market conditions

Natural gas prices within the United States

The price tag the consumer sees on their utility bill varies greatly from state to state and even from city to city. These differences can be accounted for by six specific variables. They are:

  1. Competition between suppliers, from within and out of state.
  2. The distance the natural gas has to travel from source to distribution.
  3. Variables of consumer demand, such as volume, timing, and volatility.
  4. State regulations govern the movement and sale of natural gas.
  5. Transmission pipeline infrastructure. This can affect the capacity of companies to move the natural gas from trading hubs, storage facilities, and production areas, to distribution centers.
  6. Distribution costs, such as taxes and other charges.

Aside from these state-specific variables affecting natural gas prices, some larger factors play a large part in the number you see on your natural gas bill. There are supply-side factors and demand-side factors.

Demand-side factors that affect natural gas prices

  • Availability and prices of other fuels
  • Winter and summer weather
  • Levels of economic growth

Supply-side factors that affect natural gas prices

  • Levels of natural gas in storage
  • Natural gas import and export volumes
  • Amount of natural gas production

Here are some of the main factors affecting natural gas prices:

Winter Weather

Winter weather can have a huge effect on both commercial and residential demand, which has a direct relation to natural gas prices. Cold weather generally means higher prices as naturally, demand increases with the need to warm homes and businesses. But if unexpected cold weather occurs, prices can rise quickly because the supply may not be available to meet the sudden demand. More natural gas in storage facilities can help to ease these effects.

Summer weather

During hot summer months, high air-conditioning usage in homes and buildings can affect natural gas prices when electric power demand increases. If supply is low during a high-demand period, prices can be affected by the spot market, which is an emergency demand natural gas supply. Spot market prices can rise sharply under these conditions.

Storage levels

Volumes of natural gas supplies held in underground storage fields usually increase during April through October, when usage is low and excess is injected into holding. They typically decrease when demand rises from November to March. Storage levels help to meet sudden increases in demand and can regulate natural gas prices.

Competition with other fuels

When the costs of other major fuel sources fall due to economic or other factors, natural gas prices go down as demand decreases. This is not a minor circumstance; major fuel-consuming industries like iron, steel, and paper mills as well as power plants often switch fuel use between natural gas, petroleum, and coal, as market prices fluctuate. This tendency to switch between fuels has become less common over the last few decades.

Economic factors

During periods of economic growth, natural gas consumption can increase as industrial and commercial sectors require more fuel to supply goods and services. The industrial sector has a great influence on natural gas prices as it uses natural gas to fuel a myriad of high-demand products such as pharmaceuticals and fertilizers.

There are ways to reduce your natural gas bill. RP Piping staff can help you assess your natural gas home system for efficiency or ways you may be spending more than you need to be. Contact us to find out how our knowledgeable, professional natural gas experts can help cut your costs.

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