Natural gas prices
Natural gas prices, as with other commodity prices, are mainly driven by supply and demand fundamentals. However, natural gas prices may also be linked to the price of crude oil and petroleum products, especially in continental Europe. Natural gas prices in the US had historically followed oil prices, but in the recent years, it has decoupled from oil and is now trending somewhat with coal prices.
The price as at 20 January 2022, on the U.S. Henry Hub index, is US. The highest peak was US in January 2005.
The 2012 surge in fracking oil and gas in the U.S. resulted in lower gas prices in the U.S. This has led to discussions in Asian oil-linked gas markets to import gas based on the Henry Hub index, which was, until very recently, the most widely used reference for US natural gas prices.
Depending on the marketplace, the price of natural gas is often expressed in currency units per volume or currency units per energy content. For example, US dollars or other currency per million British thermal units, thousand cubic feet, or 1,000 cubic meters. Note that, for natural gas price comparisons$, per million Btu multiplied by 1.025 = $ per Mcf of pipeline-quality gas, which is what is delivered to consumers. For rough comparisons, one million Btu is approximately equal to a thousand cubic feet of natural gas. Pipeline-quality gas has an energy value slightly higher than that of pure methane, which has. Natural gas as it comes out of the ground is most often predominantly methane, but may have a wide range of energy values, from much lower to much higher than standard pipeline-quality gas.
U.S. market mechanisms
The natural gas market in the United States is split between the financial market, based on the NYMEX futures contract, and the physical market, the price paid for actual deliveries of natural gas and individual delivery points around the United States. Market mechanisms in Europe and other parts of the world are similar, but not as well developed or complex as in the United States.Futures market
The standardized NYMEX natural gas futures contract is for delivery of 10,000 million Btu of energy at Henry Hub in Louisiana over a given delivery month consisting of a varying number of days. As a coarse approximation, 1000 cu ft of natural gas ≈ 1 million Btu ≈ 1 GJ. Monthly contracts expire 3–5 days in advance of the first day of the delivery month, at which points traders may either settle their positions financially with other traders in the market or choose to "go physical" and accept delivery of physical natural gas.Most financial transactions for natural gas actually take place off exchange in the over-the-counter markets using "look-alike" contracts that match the general terms and characteristics of the NYMEX futures contract and settle against the final NYMEX contract value, but that are not subject to the regulations and market rules required on the actual exchange.
It is also important to note that nearly all participants in the financial gas market, whether on or off exchange, participate solely as a financial exercise in order to profit from the net cash flows that occur when financial contracts are settled among counterparties at the expiration of a trading contract. This practice allows for the hedging of financial exposure to transactions in the physical market by allowing physical suppliers and users of natural gas to net their gains in the financial market against the cost of their physical transactions that will occur later on. It also allows individuals and organizations with no need or exposure to large quantities of physical natural gas to participate in the natural gas market for the sole purpose of gaining from trading activities.
Physical market
Generally speaking, physical prices at the beginning of any calendar month at any particular delivery location are based on the final settled forward financial price for a given delivery period, plus the settled "basis" value for that location. Once a forward contract period has expired, gas is then traded daily in a "day ahead market" wherein prices for any particular day are determined on the preceding day by traders using localized supply and demand conditions, in particular weather forecasts, at a particular delivery location. The average of all of the individual daily markets in a given month is then referred to as the "index" price for that month at that particular location, and it is not uncommon for the index price for a particular month to vary greatly from the settled futures price from a month earlier.Many market participants, especially those transacting in gas at the wellhead stage, then add or subtract a small amount to the nearest physical market price to arrive at their ultimate final transaction price.
Once a particular day's gas obligations are finalized in the day-ahead market, traders will work together with counterparties and pipeline representatives to "schedule" the flows of gas into and out of individual pipelines and meters. Because, in general, injections must equal withdrawals, pipeline scheduling and regulations are a major driver of trading activities, and quite often the financial penalties inflicted by pipelines onto shippers who violate their terms of service are well in excess of losses a trader may otherwise incur in the market correcting the problem.
Basis market
Because market conditions vary between Henry Hub and the roughly 40 or so physical trading locations around United States, financial traders also usually transact simultaneously in financial "basis" contracts intended to approximate these differences in geography and local market conditions. The rules around these contracts - and the conditions under which they are traded - are nearly identical to those for the underlying gas futures contract.Derivatives and market instruments
Because the U.S. natural gas market is so large and well developed and has many independent parts, it enables many market participants to transact under complex structures and to use market instruments that are not otherwise available in a simple commodity market where the only transactions available are to purchase or sell the underlying product. For instance, options and other derivative transactions are very common, especially in the OTC market, as are "swap" transactions where participants exchange rights to future cash flows based on underlying index prices or delivery obligations or time periods. Participants use these tools to further hedge their financial exposure to the underlying price of natural gas.Natural gas demand
The demand for natural gas is mainly driven by the following factors:- Weather
- Demographics
- Economic growth
- Price increases, and poverty
- Fuel competition
- Storage
- Exports
Weather
Natural gas demand usually peaks during the coldest months of the year and is lowest during the "shoulder" months. During the warmest summer months, demand increases again. Due to the shift in population in the United States toward the sun belt, summer demand for natural gas is rising faster than winter demand.
Temperature effects are measured in terms of 'heating degree days' during the winter, and 'cooling degree days' during the summer. HDDs are calculated by subtracting the average temperature for a day from. Thus, if the average temperature for a day is, there are 15 HDDs. If the average temperature is 65 °F, HDD is zero.
Cooling degree days are also measured by the difference between the average temperature and 65 °F. Thus, if the average temperature is, there are 15 CDDs. If the average temperature is 65 °F, CDD is zero.
Hurricanes can affect both the supply of and demand for natural gas. For example, as hurricanes approach the Gulf of Mexico, offshore natural gas platforms are shut down as workers evacuate, thereby shutting in production. In addition, hurricanes can also cause severe destruction to offshore production facilities. For example, Hurricane Katrina resulted in massive shut-ins of natural gas production.
Hurricane damage can also reduce natural gas demand. The destruction of power lines interrupting electricity produced by natural gas can result in significant reduction in demand for a given area.