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Top 4 Factors Affecting USA Natural Gas Prices

The recent weeks have witnessed an unprecedented spike in the prices of natural gas in the US. According to a report published by EIA, Natural gas accounted for nearly 34% of the total energy consumption of the US in 2020. The consuming sectors are Electric Power, Industrial, Residential, commercial and transportation (in the order of consumption from the largest to the smallest). 

The electric power sector consumes 3 % of the total natural gas in the US which it does to produce electricity and for useful thermal output. The Industrial sector at 33 % consumes natural gas for a variety of uses from using it as plant fuel to using it as a raw material to produce chemicals and hydrogen.

The residential sector, at 15% of total consumption, uses natural gas for heating space and water and to cook as well. The commercial sector, at 10%, uses natural gas to operate refrigeration equipment, heat buildings and water, outdoor lighting and many other such applications. Finally, natural gas is also used as vehicle fuel especially in government-owned vehicles making it an important vehicle fuel with consumption pegged at 3%.   

While the US produces most of its own natural gas, it imports a small percentage mostly from Canada via pipelines and sometimes in the form of  LNG and CNG using trucks. The US is also an exporter of natural gas with 69% of the exports going to Mexico. The lack of dependency on imports of natural gas provides the US insulation against rising natural gas prices in Asia and Europe.

So why is there a surge in natural gas prices in the US today?
Read on to find out which factors have a significant impact on natural gas prices in the US.  

  1. Seasonal demand and Weather woes 

In the USA, natural gas is directly transported to homes for heating. Approximately half the homes in the country depend on natural gas for space and water heating with more than 65% of homes in the midwest using natural gas for heating. Residential heating consumes nearly 15% of natural gas in the US. Not to forget that with the dip in temperatures, the need for commercial heating also goes up.

Thus, the onset of winters has a significant impact on natural gas prices. As demand for heating rises exponentially during the cold weather, the gas prices undergo considerable change. Further disruptions in the form of freeze-offs happen during extremely cold winter months which was witnessed by Texans this year in February when natural gas wells and pipes froze. 

It is not just winters that see a spike in energy demand, but also hot summers when the demand for air-conditioning rises. This scenario played out this year when the Northwest experienced an extended heatwave eating into the gas supplies earmarked for winters. The US is a natural gas producer, but Hurricane IDA disrupted crude oil production and refinery work causing production to fall and prices to increase. 

The climate has not been a friend this year and with the rising changes in climate, more hurricanes are likely to disrupt production in the future.  

  1. Natural gas storage 

Natural gas is usually stored in underground facilities which mainly consist of depleted oil reservoirs or natural gas fields, salt cavern formations, and aquifers. In the US,  natural gas is mostly stored in depleted oil or natural gas fields located close to utilization centres. 

If the natural gas reserves are adequate to meet demand, then the gas prices remain stable otherwise an inability to meet demand leads to a hike in prices. 

According to a report published by EIA, the Working natural gas reserves are 14% lower than the level last year and 5% lower than the five-year (2016–2020) average for the week ending 6th October 2021. A plausible reason for the low reserves would be the harsh winter in the early months of 2021 and the hot summers in the Northwest.

Generally, the summer season sees massive injections of gas in the reserves in the anticipation of winters but a long winter and a harsh summer have disturbed the formula that the US follows every year. 

  1. The health of the US Economy 

Economic growth can influence natural gas prices. If the economy is thriving, the industrial and commercial output increases thereby increasing the consumption of energy. The Industrial sector accounts for nearly 33% of the USA’s natural gas consumption. 

As explained earlier, when demand increases so do the prices. However, the opposite is noticed when the economy lags. Last year, the US witnessed a drop in energy consumption after the pandemic hit the country. Industries put their operations on hold, reducing their energy consumption and prices of natural gas. 

  1. Fuel Switching 

Large consumers of fuel like power plants and paper mills can easily switch between fuels depending on which fuel is least expensive. If the cost of petroleum or coal falls, these large consumers switch to cheaper fuels leading to a drop in demand of natural gas and a drop in its prices too.