Spend Matters welcomes a guest post from Awies Qureshi of Mintec.
In the UK we naturally think of natural gas as something we use to warm our homes and offices (in the US everyone thinks of air conditioning!). However we are not that different, if you stop to consider how air conditioning works. The US also relies on natural gas for heating and cooling as the electricity required powering the air conditioning units might well be derived from natural gas.
Natural gas is the third most used source of energy in the world after coal and crude oil. According to the EIA in the US, “coal-fired electricity generation has traditionally been the largest component of electricity generation, representing 37% of total generation in 2012. By 2035, however, natural gas generation is projected to surpass coal generation. Coal and natural gas each represent 34% of total generation in 2035, but by 2040 the coal share drops to 32%, and the natural gas share increases to 35%.”
We all remember the bitterly cold temperatures earlier this year, which saw natural gas prices reach a five-year high as the freezing temperatures in the US led to higher than normal demand for heating. The short-term effect was to reduce gas storage levels to an 11-year low. However as the weather warmed up, prices eased as gas supplies were gradually replenished. In July prices fell by over 20% month-over-month, which is unusual for the time of year.
The US has played an important role in the global growth of natural gas and is the world’s largest producer, accounting for around 20% of global production. But the US wasn’t always the largest producer. The shale gas revolution has driven a seismic shift (pun intended) in production as the US went from being the largest importer of natural gas in 2007 to being almost entirely self-sufficient by 2011.
Demand for natural gas tends to vary seasonally. Unsurprisingly July is usually one of the peak months, but this year unseasonably cool weather in some of the hotter parts of the US has reduced the need for air conditioning. This has led to an easing of concerns over the reduced storage levels.
As this year has shown, storage levels can have a significant effect on gas price movements due to the buffer they provide during high demand periods. Since the spike in demand at the start of the year, levels have remained low compared to previous years. However, the amount of gas added into storage over the past few months has been healthy and the amount of gas withdrawn from storage in May was 18% below the five-year average for the month. Consequently, storage levels have increased rather than decreased.
Recent weather forecasts show that warmer temperatures will be seen over the US, which has resulted in an uptick on prices this month. Even so, average demand for natural gas this summer is expected to be lower than that in previous years. As a result of this, prices are not expected to rise very much until we get into the winter months.