Trading Natural Gas 101
Jun 27, 2014

Factors driving the natural gas market today

Back in 2005, the price of natural gas was closely tied to the price of oil, with the cheapest one always driving the market price. If natural gas was cheaper, power plants burned natural gas to produce electricity. And if oil was cheaper, they burned oil instead. But in today’s world, the influencers are significantly different.

Hurricane Forces

Just before 2005, over 20% of US natural gas production came out of the Gulf of Mexico and over 50% of the gas processing plants were located in the Gulf Region. But, a little weather event named Hurricane Katrina wreaked havoc on natural gas production.

Hurricane Katrina, born off the coast of Africa, decimated the Gulf Coast, along with the oil and gas platforms producing natural gas there. The processing plants were submerged underwater, and it took almost six months to get back to capacity. Thanks to Katrina, natural gas supply couldn’t meet demand, and prices skyrocketed.

Today, with less than 6% of the nation’s gas coming out of the Gulf, hurricane season poses a minimal threat to production. Although the processing plants are still vulnerable along the coast, any weather interruptions would be temporary, unless a hurricane with the force of Katrina hit again. But, the risk of another Hurricane Katrina is much lower today than it was back in 2005. Thanks to global warming, the jet stream off the West Coast of Africa has shifted a bit south, and so significant hurricanes off of Africa now move harmlessly into the North Atlantic.

Natural Gas Production and Storage

The next impact on the market came in 2008, when natural gas prices were at an average of $8.69/MMbtu. In this year, the fracking boom hit; more rigs were drilling, production soared and the price of natural gas collapsed to $2.843/MMbtu on the NYMEX (New York Mercantile Exchange) by September 2009.

Bolstered only by brief winter cold snaps, from 2009 until 2011, the strategy was to buy gas in the spring or fall when prices were low, locking in a fixed rate for those cold winter months when prices were certain to increase again.

Then came the “winter that never was…” Going into the cold season of 2011/2012, prices were relatively low and national storage facilities were full, with the coming winter temperatures expected to burn-off all that available gas. But, the cold never arrived, and gas prices collapsed from $3.524/MMbtu in November, 2011, to a low of $2.036/MMbtu in May, 2012. For the next 18 months, natural gas prices continued to trade in a very narrow range between $3.20/MMbtu and $4.40/MMbtu. Even a normal winter weather pattern in 2012 to 2013 was not enough to push prices up in the face of record storage.

Cold Weather Extremes

The winter of 2013-2014 changed the game, yet again.  Not just one, but several waves, one after the other, of sub-zero temperatures, battered the Midwest, the Heartland and even the Northeast. No one escaped the cold weather. Even the South saw single digits. Winter lagged on and national storage ended the season with less than 1 trillion cubic feet, a level not seen since 2003, well before fracking became a significant technology in production.

Prices spiked around the country as demand outstripped the capacity of pipelines to deliver the huge volumes of gas required.  Natural gas prices ranged across the country in January/February; $29.80/MMbtu in California, $19.80/MMbtu in Chicago, $30.40/MMbtu in North Carolina, $48.00/MMbtu in NY/NJ, and even higher in isolated utilities across the US.

Psychology of the Marketplace

After last winter, the psychology of the marketplace became one of fear; of there not being enough gas in national storage to get us through another Polar Vortex/winter. And greedy traders easily prey upon this fear by suggesting that storage may not be filled when the “iceman cometh.”

However, if we take a look at NYMEX, the board where gas is traded, we can see that prices currently range from $4.584 for July 2014 to a high of $4.861 in Feb 2015. Not a big spread. Gas prices come down then in March, 2015 to $4.714; pretty much as expected at the end of winter, but fall off the cliff to $4.116 in April, 2015!

For the rest of 2015 through January 2016, prices do not rise – and when they do, it is to $4.419; a price that is less than it is today! So what might that mean? It could be the expectation of continued increases in production, which would fill national storage at reasonable prices, where producers could make a profit, yet still fill storage. Or, perhaps traders have no interest in speculating that far out, and prices will rise or fall the closer we get to the actual time period.

With meteorologists predicting an El Nino weather pattern shaping up by this fall, it looks as if we’ll have a wet winter, but not much in the way of extreme cold weather. As always, it remains to be seen how natural gas prices will respond.

The Role of Your Energy Consultant

Regardless of all predictions, though, natural gas pricing is not an exact science – far from it. Weather, supply and demand, pipeline capacity, storage and psychology all play into the final price and what people are willing to pay. Understanding and following all the variables that change from minute to minute is a daunting task for the uninitiated.  By working with an energy consultant who can sort through all the confusion – the clutter, noise and hype – you’ll be better able to maximize savings, minimize risk, and be protected from market anomalies and winter spikes.

Contributor, Larry Kauf, is a Senior Analyst and multi-location Account Specialist with Alternative Utility Services, Inc; providing a wide range of professional procurement and consulting services including electric, gas, residential, reverse auction, demand response, auditing, and benchmarking.

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