Increases in natural gas supply usually lead to reduced prices, whereas declines in supply usually result in higher costs. Demand increases tend to lead to higher prices, while demand drops tend to lead to lower prices. Higher prices, on the other hand, tend to temper or reduce demand while encouraging output, whereas lower prices have the reverse impact.
Short-term spikes in demand and/or reductions in supply may cause major swings in natural gas prices, especially during the winter, due to natural gas supply infrastructure constraints and the inability of many natural gas consumers to switch fuels fast.
How is the price of natural gas calculated?
Natural gas can be priced in dollars per therm, dollars per MMBtu, or dollars per cubic foot in the United States.
1 To translate these costs from one price basis to another, the heat content of natural gas per physical unit (such as Btu per cubic foot) is required. The annual average heat content of natural gas provided to consumers in the United States in 2020 was around 1,037 Btu per cubic foot. As a result, 100 Ccf of natural gas equals 103,700 Btu, or 1.037 therms. A thousand cubic feet (Mcf) of natural gas equals 1.037 million British thermal units (MBtu), or 10.37 therms.
These calculations can be used to convert natural gas prices from one pricing basis to another (assuming a heat content of 1,037 Btu per cubic foot):
Natural gas heat content varies by location and type of natural gas customer, as well as with time. For information on the heat content of the natural gas they supply to their clients, consumers and analysts should contact natural gas distribution firms or natural gas suppliers. Customers’ invoices may include this information from some natural gas distribution providers or utilities.
1 Natural gas was measured in cubic feet by the US Energy Information Administration from 1964 to 1964 at a pressure of 14.65 psia (poundspersquareinchabsolute) at 60 degrees Fahrenheit. Since 1965, the pressurebase has been 14.73 psia at 60 degrees Fahrenheit.
What is the natural gas pricing basis?
Due to the ever-changing market volatility, new energy managers should examine their natural gas purchasing strategy and grasp the components of their total gas price.
We discuss two key components of energy price in the third part of our Gas 101 video series: commodity price, which is based on the NYMEX Henry Hub futures price, and basis (e.g., transportation and storage are two elements of basis).
What is Commodity Price?
The NYMEX, a national and international natural gas benchmark price, determines a customer’s commodity pricing. The NYMEX Henry Hub futures price is based on the price of gas at the Henry Hub in Erath, Louisiana, and serves as the official delivery point for NYMEX futures contracts. A futures contract relates to the current value of future gas deliveries, so January 2023 gas, for example, has real, trading value today in 2021.
The NYMEX can be used by all clients to determine their physical natural gas pricing. Many customers find it transparent because they may see NYMEX prices online at any time. The NYMEX represents the overall worth of natural gas at a given time, however the local cost of gas is more dependent on the region’s supply and demand, weather, and other factors; here is where the basis price comes into play.
What is Basis?
The basis is the difference in price between the NYMEX (the global benchmark) and the local gas price (the specific location). It is frequently confused with transportation, but transportation is simply one of many elements that can influence basis pricing. Because it is determined as a price differential, it is conceivable to have a negative price. Basis includes your physical costs for transportation, fuel, storage, and local production.
Working Together:
The total gas price is equal to the commodity (or NYMEX) plus the basis. Customers have more alternatives in how they manage price risk over time since they can lock or float various price components independently.
Gas Purchasing Strategies
Many companies and organizations have switched their focus away from price alone. Long-term budget certainty and uncertainty are aided by strategic risk management of both NYMEX and base costs. Customers frequently utilize the three basic price instrumentsFixing, Floating, and Managingto develop their strategy, and they frequently use more than one at the same time.
Maximizing price certainty: Fixing a price
Fixed pricing refers to a method of securing a set price per million British Thermal Units (MMbtu) or dekatherm (dth) for volume and term at a specific delivery point. The NYMEX price, the basis price, or both can be fixed by a customer. Fixed pricing has the advantage of price certainty; the only unknown is how much their business will actually utilize. Energy managers must estimate their company’ energy usage at the start of the contract and will be charged for that estimate for the duration of the contract. Aside from the risk of buying more gas than necessary, another disadvantage of fixed pricing is that clients may miss out on a reduced cost if the market falls.
Maximizing market opportunity: Floating a price
Floating is a method that gives you the current market price at the moment of flow, allowing you to profit from market fluctuations. According to Jenny Herlache, director of regional sales at Constellation, “customers may gain from a floating price, but they must be prepared and able to take on risk if the market changes drastically.”
Balancing flexibility and certainty: Managing a portfolio
When the market is rising, it is the perfect time to lock. When the market is falling, it is the perfect time to float. This is the problem: how do you predict which way the market will move? That’s why you take a balanced approach: plan for both and design a portfolio using both pricing instruments (a mix of fixed and floating).
You can lock in a portion of your pricing to protect yourself against market fluctuations. Some will be left open to float with the market and take advantage of any market falls. “This strikes a decent mix between budget predictability and risk tolerance,” Herlache says. ” It’s similar to a 401(k) plan in that you invest at regular periods and may not see high highs or low lows. You buy the gas you need at different times throughout your contract.”
The SmartPortfolio application from Constellation is a useful tool for automating diverse purchasing. It provides different levels of volatility protection, allowing you to select the best plan for your budgetary needs and manage your risk over time using dollar-cost averaging.
What factors go into determining gas prices?
If you haven’t noticed, gas prices in some areas increased by more than 50 cents last week, and as they approach $2 a gallon, we have to question why. As a result, we conducted some research. Here’s what we discovered:
How gas are prices determined
Gasoline prices are determined by four factors: taxes, distribution and marketing, refining costs, and crude oil prices. The price of crude oil accounts for approximately 70% of the price you pay at the pump, so when it fluctuates (which it does frequently), we feel the consequences. Crude oil prices fluctuate based on the market’s available supply and demand for that supply.
What affects the demand of crude oil?
The demand for crude oil rises as countries throughout the world become more industrialized and expand. The demand for crude oil has risen every year since 1980, and this trend is expected to continue well into 2030.
On a lesser scale, gasoline demand fluctuates based on what’s going on in the United States. Prices will rise around major travel holidays such as Thanksgiving and Christmas, while they will fall during cold or snowy weather that prohibits or discourages travel.
What controls the supply of crude oil?
The Organization of Petroleum Exporting Countries (OPEC) is a 12-country cartel that controls 78 percent of the world’s known oil supply. Russia, Canada, and the United States are the only major oil-producing countries that are not members of OPEC. Because OPEC controls so much of the supply, it has a huge influence on the price, even if the crude oil is produced in the United States.
If OPEC members want global oil prices to rise, they can reduce supply by selling fewer barrels to the market. They can flood the market with oil if they want the price of oil to decline (reducing revenues for their competitors). Other producers in Canada, Russia, and the United States can do the same thing, but with considerably less impact. Whoever has the most control over oil has the most power to alter its price.
So what does it all mean?
In summary, the price of crude oil determines the majority of what you pay at the pump; the price of crude oil fluctuates based on supply and demand; oil demand fluctuates based on many factors, but is increasing overall due to industrialization; and OPEC controls more than three quarters of the oil supply.
As a result, the price you pay at the pump is determined by market supply, which is controlled by OPEC. What caused the price of gasoline to rise last week? Refineries have been reported to be shutting down for inspection, and more people are traveling as the weather begins to warm up. However, we can’t be certain what caused it. We only know that the price per barrel increased by more than $3 in a week (not per gallon), and we’d be surprised if that increase wasn’t linked to OPEC.
What variables influence natural gas prices?
Natural gas prices are mostly determined by supply and demand in the market. Because there are few short-term alternatives to natural gas as a fuel for heating and electricity generation during periods of high demand, changes in supply or demand over a short period of time can result in significant price fluctuations. Prices frequently operate as a supply and demand balancer.
Natural gas output, net imports, and storage inventory levels are all supply-side factors that influence prices. Supply increases tend to draw prices down, while supply decreases tend to push prices up. Natural gas production and imports, as well as sales from natural gas storage stockpiles, tend to increase when prices rise. Prices that are falling have the opposite effect.
Weather (temperatures), economic conditions, and petroleum prices are all factors that influence demand. Cold weather (low temperatures) increases heating demand, whereas hot weather (high temperatures) increases cooling demand, causing electric power plants to use more natural gas. Natural gas demand is influenced by economic conditions, particularly by manufacturers. Petroleum fuel prices, which may be a cost-effective alternative to natural gas for power producers, factories, and major building owners, may help to moderate demand. Higher demand usually results in higher pricing, whereas decreased demand can result in lower prices. Price increases and decreases have the effect of reducing or increasing demand.
Other FAQs about Natural Gas
- A kilowatthour of electricity is generated using how much coal, natural gas, or petroleum?
- How much does it cost to produce electricity using various power plants?
- How much of the carbon dioxide produced in the United States is due to power generation?
- Is the EIA able to provide data on energy use and prices for cities, counties, or zip codes?
- What are the differences between Ccf, Mcf, Btu, and therms? What is the best way to convert natural gas costs from dollars per Ccf or Mcf to dollars per Btu or therm?
- In the Weekly Natural Gas Storage Report, how does EIA determine the year-ago and five-year averages?
- Does the EIA provide state-by-state estimates or projections for energy output, consumption, and prices?
- Why am I paying more for heating oil or propane than what is listed on the EIA website?
- Is the EIA aware of any unplanned disruptions or shutdowns of energy infrastructure in the United States?
What is the source of natural gas’s high cost?
The current price increase is being driven by a decrease in the amount of natural gas held in storage in the United States. According to the US Energy Department, gas in storage was 17% below its five-year average this week. Commodity traders, however, reacted this week to forecasts of hotter weather in the Southwest. Hot weather raises gas prices by increasing demand for air conditioning.
“Weather has the ability to shift these values drastically up and down,” Molchanov said. “If it’s a really hot summer, the price goes up; if it’s a very cold winter, the price goes up.”
Who has the most affordable natural gas?
Natural gas prices in Utah are the cheapest, at $9.12 per 1,000 cubic feet. That’s approximately 8% less than second-placed Montana. For the month, the average rate was $17.57.
What factors go into determining the Henry Hub spot price?
Because it is based on the real supply and demand of natural gas as a stand-alone commodity, Henry Hub is an important market clearing pricing idea. The hub pricing points in other natural gas markets, such as Europe, are fragmented. As a result, natural gas prices are frequently indexed to crude oil, which can be affected by a wide range of supply and demand factors. Attempts are being undertaken in the Netherlands and the United Kingdom to build European hub pricing points, but competition from national hubs has made this impossible thus far. Although Singapore would prefer to play this regional role, Asian natural gas markets are significantly more fragmented and lack a fixed hub pricing point. As a result, all Asian natural gas prices are either tied to Henry Hub or indexed to crude oil.
What criteria are used to evaluate natural gas futures?
A futures contract’s value is determined by multiplying the current market price by the contract’s size. Because a futures contract is 10,000 million (10 billion) BTUs in size, the current price is simply multiplied by 10,000.
When does natural gas come to a halt?
On the , the spot (expiring) month will settle based on the VWAP of the outright CME Globex trades executed between 14:00:00 and day of expiration 14:30:00 ET, and the second month will settle based on the VWAP of the outright CME Globex trades executed between 14:28:00 and 14:30:00 ET.
How do gas stations know when to raise or lower their prices?
According to the US EIA website: “If crude oil supply, refinery operations, or gasoline pipeline deliveries are disrupted, gasoline prices can vary quickly. Gasoline prices fluctuate even while crude oil prices are steady due to seasonal changes in demand and gasoline specifications.”