In contrast to crude oil, natural gas is almost strictly a domestic North American commodity* whose price is more influenced by weather and the health of the US economy. Other factors, such as the level of US natural gas inventory, impact prices on a weekly basis. While US economic indicators, such as the stock market, employment figures, housing and, manufacturing indexes, are deemed to be indicative of demand for natural gas, global economies and the US dollar do not have much affect on pricing in this country.
Natural gas is used in more than 50% of US homes for space heating and hot water. In addition, it is the second largest source of energy for electrical generation behind coal (Figure 1) and is widely used in commercial and industrial industries. Figure 2 illustrates the break-down by consuming sector.
The main sources of natural gas supply in the US are domestic production, imports and, Liquefied Natural Gas (LNG). Canada again represents the largest source of imported natural gas, with Mexico contributing a minor amount. Additionally, there are export points into Canada and Mexico. The map below indicates the major import/export and, LNG import points in the US.
Domestic production in the US has grown dramatically in recent years due to the same advanced technologies that have allowed crude oil production to increase: “3-D” seismology, horizontal drilling and new “fracking” methods. All contribute to successful recoveries from hard formations such as the new “shales.” Figure 7 illustrates the growth in production of the currently active shale basins in the US.
Among the major factors influencing US natural gas prices are:
The following video goes into greater detail for the factors which can influence natural gas prices.(The lecture notes can be found in the Modules under Lesson 2: Supply/Demand Fundamentals for Natural Gas & Crude Oil in Canvas.)
As we explore pricing for crude oil and natural gas in a later lesson, we will consider the major influential factors for each and define their individual impact. We will also have a weekly activity about the market prices for crude oil and natural gas and the factors we believe affect them.
*In a future lesson, we will discuss the plans for exporting natural gas in the form of LNG. That will make North American natural gas a global commodity similar to crude.
Links
[1] http://www.eia.gov