Spend Matters welcomes a guest post from Awies Qureshi of Mintec.
Yes, Hell has really frozen over! Well, at least it has in the small town of Hell in Michigan. Bitterly cold temperatures in the US have meant more demand for heating, resulting increases in natural gas prices. Before we get to the “why?” behind the price increase, let’s take a look at the “what”, so here are a few key facts you should know about natural gas.
The US is the largest producer of natural gas, producing around 20% of global production. It is the third most used source of energy in the world after coal and crude oil. Natural gas has come a long way since it was first used to fuel street lamps in 1816. It has many applications from power generation and heating to cooking and transportation. It is also an essential raw material for the production of many commodities.
From 2007 to 2011 the US went from being the largest importer of natural gas to being almost entirely self-sufficient. The “shale gas revolution” is the major contributing factor to the growth in production. This has resulted in prices dropping from the double-digit highs in 2008 to the low seen in 2012. However, prices have been rising steadily since then and by the start of 2014 had increased by 32% year-over-year.
So why have prices increased? It is well known that natural gas demand varies seasonally, typically peaking during the coldest months and falling during the warm months. Although increases are expected during this season, in the last month prices have increased significantly with the Henry Hub benchmark price rising 13% month-over-month. This increase is due to abnormally cold weather in the northern and central parts of the US, causing households to consume more natural gas to heat their homes. Additionally, supply has fallen marginally as some producers are unable to meet their forecasted output. In some states, natural gas prices for next day delivery rose to record highs. In New York, for example, the price rose to almost 20 times the benchmark.
Where do prices go from here? As Peter Drucker once said, “Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” But I’ll take an educated guess anyway. It seems in the near future prices will remain at a relatively high level but should drop when the cold streak comes to an end as demand for heating falls and production goes back to its normal level.
As far as Hell is concerned, the snow will start to melt and life shall go back to normal there also.