Gas prices were recently at a historic 17-year low and some experts say prices are on the rise! Let’s look at what goes into natural gas pricing and why we may see an increase in prices in the future.
The 2 big factors currently affecting natural gas prices: Supply and Demand
When the weather changes for the worse, as in the case of a harshly-cold winter or a brutally-hot summer, demand for energy can soar. Increased demand for natural gas allows producers to sell their commodity at a premium rate (because demand is up).
On the other hand, one of the main reasons we experienced a 17-year low in natural gas prices is because the supply exceeded the demand. Brought on by a warmer winter (the time when most people normally use natural gas to heat their homes) and an increase in production, a surplus, or a glut, of natural gas can drive down costs. At this point, natural gas producers sell their commodity at a bottom-dollar rate (because supply is up).
Glut: a fancy word that refers to the overabundance of natural gas supply in the market.
But times are changing: a hot summer is here and a cold winter is coming. Experts say that we have now shifted from an El Niño weather pattern to a La Niña weather pattern. While the El Niño pattern was responsible for the warm winter in the Northern Hemisphere in 2015-2016, La Niña is said to bring even hotter temperatures later this year. And, since 33% of US electricity is natural gas generated, the need for more air conditioning will boost demand for natural gas—and there’s still more to the story.
A natural gas supply deficit is predicted at the end of 2016
Even though our supply has grown to abundance, the following factors may lead to a quick deficit:
- A supply glut may result in lower prices and less profitability for producers.
- Natural gas being used for more things, such as electricity generation, drains supply faster.
- Increase in the exportation of Liquefied Natural Gas (LNG) adds to the drain on our supply.
What will most likely tip the scales, however, is the fact that many producers have stopped drilling or are filing bankruptcy because they simply can’t make enough money selling cheap gas. Add all these factors together and it’s easy to see why experts are predicting a shortage in supply.
This is a good example of the influence of supply and demand. The abundance in supply we’ve experienced will start to be depleted because of the eventual increase in demand. Inevitably, when the demand rises past supply, natural gas prices will increase, and energy costs will go up.
There is a lot that goes in to your energy – so we created this energy choices guide to help you learn more about what other influences there are to heating, cooling, and powering your home.