Demand Heats Up US Natural Gas Prices

Spend Matters welcomes this guest post from Verity Michie, market analyst at Mintec.

Natural gas is the third most used source of energy, behind crude oil and coal. The U.S. accounts for approximately 20% of global natural gas production, making it the world’s largest producer. Today, we look at why natural gas prices in the U.S. have risen in 2016 after falling for the last two years.

Natural gas prices reached the lowest level seen in 17 years this February, due to record production. However, prices surged 90% from February to the peak for this year in October. This is because gas companies were forced to scale back on drilling programmes as a result of the low prices seen previously. The number of active natural gas rigs in the U.S. fell to a record low at 81 this August, down sharply compared with the record high of 1,606 seen in 2008. Although the number of rigs rose to 115 by mid-November, it remains down from 184 last year. As a result, production has been in decline since April. Overall production for 2016 is forecast to decrease by 2% year-over-year, to 77.3 billion cubic feet per day (Bcf/d).

In addition to lower production, an increase in demand has also added upward pressure to prices.   This November marked the first time in over 60 years that the U.S. was a net exporter of natural gas. Gas exports from the U.S. rose by both pipeline, driven by strong demand from Mexico’s electric power sector, and from the countries first Liquefied Natural Gas (LNG) terminals.

U.S. domestic consumption has remained robust this year, due to an increase in requirement for electric power generation. Environmental regulations, such as the Mercury and Air Toxic Standards, have led to cuts in coal-fired capacity. Natural gas is considered more environmentally friendly than coal, as it releases around half the amount of carbon emissions. Furthermore, hotter-than-usual weather conditions from the end of May boosted demand for air conditioning and therefore electricity. As a result, total consumption for 2016 is forecast at 75.7m Bcf/d, up 1% y-o-y.

As winter heating demand usually drags stocks down between November and March, this is bound to raise concerns over whether supplies will actually be able to keep up with demand, and of further prices increases.

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