Natural Gas - What Factors Impact Gas Prices

Many people have asked - what are some of the factors that impact natural gas prices and why have natural gas prices steadily risen over the past few years?

Eventhough gas prices have moderated a bit this year after the supply distruptions from the hurricanes last year, we still have not seen the low levels like we did thoughout the 1990s. A number of underying factors have contributed to the price volitilityof natural gas this year.

1 - Production - The production of natural gas impacts not only the supply that is available but also the price. Through August of this year, production is slightly lower than recent years.

2 - Imports - Although the U.S. produces quite a bit of natural gas, we still import much of our supply. Most of this comes from Canada, but some comes in the form of liquified natural gas (LNG) from overseas. Recent EIA estimated project that for 2006, total imports will decline about 6.1 percent from 2005 levels.

3 - Storage - Throughout the year, natural gas is injected into the nderground storage facilities to help keep up with increased demand during the winter heating season. This year, we have seen consistently high storage levels that are projected to be above the 5-year average during the heating season.

4 - Demand - Demand impacts supply which impacts price. As of August of this year, natural gas consumption is about 2.5 percent below levels seen in 2005. The EIA projects natural gas demand will show no growth for 2006.

5 - Oil Prices - Crude oil prices reached record levels this year - averaging over $74 per barrel in July. However, we have seen these prices decline in recent months - averaging about $59 per barrel in October. The EIA projects that crude oil prices will average about $66 per barrel for 2006, which is a 17 percent increase over 2005 prices.

These are some of the main factors that contribute to natural gas prices in today's market. The EIA has predicted that natural gas prices paid by commercial and industrial customers should be on average about 22 percent less this heating season that last. This is only a forecast, and any forecast could be impacted by a number of factors - a prolonged cold spell, an interuption in supplies, or a disruption in other fuel supplies such as petroleum or electricity could all impact natural gas prices.