There are a number of uncontrollable factors that affect the price of natural gas in both the short and long term.
The unpredictability of the weather and various economic events has drastically affected the price of natural gas.
The most important factor in determining short-term price movement in North America is the weather, and in particular the effect of temperature on the need for winter heating and summer cooling. Prices tend to follow a seasonal cycle with higher prices in the winter and summer and lower prices in the spring and fall. El Nino and Hurricanes have also shown a significant impact on natural gas prices.
Europe and Asia have a natural gas supply shortage. The price of LNG trades approximately 4 to 6 times higher than North American prices. It costs roughly $6.00 US/MMBtu to transport LNG from North America to those markets and reliquefy it for consumption. So, it costs about $13 to $14 US/MMBtu to land LNG in Europe and Asia where prices are trading in the $25 to $40 US/MMBtu range. The United States currently has 12.2 Bcfd of LNG export capacity, with an additional 5.3 Bcfd expected to be online by July 2024. Canada is expected to bring an additional 1.3 Bcfd online in 2025, bringing the North American total LNG export capacity to 18.8 Bcfd at that time.
Industrial demand tends to run in lock step with overall economic indicators. When the economy is in a downturn, demand tends to be weaker, and when the economy is running strong, natural gas demand tends to be higher
Global events that impact supply and/or demand will have an impact on natural gas prices as well. The most recent example is the Russian invasion of Ukraine, which has had a major impact on oil and natural gas prices as the market looks to replace Russian supplies.
Crude oil and natural gas prices tend to be inter-related, where natural gas prices typically track the fluctuations of the crude oil market. Typically when crude oil prices have experienced highs due to strong global demand and on-going disruptive circumstances in oil-producing countries, uncertainty increases regarding the dependability of the commodity supply. During these price fluctuations, many energy consumers practice fuel switching, which is a temporary change from one fuel to another to avoid gas price increases. This activity puts upward pressure on the demand for natural gas, thus increasing its price.
The number of oil and natural gas rigs deployed to drill for and extract energy supply is a metric that is closely monitored. There is a correlation between the number of rigs drilling and the supply we can expect to see in the market over the next 3 to 4 months. Low rig counts make market analysts nervous that the market may be undersupplied.
Currently, the number of oil and natural gas wells deployed are at only 35% of expectations. That is, at current prices, the market would expect to see approximately 2,200 rigs deployed, yet there are only 780 rigs in service.
The subdued response from producers, resulting in lower levels of rig activity than projected by historical correlations is due primarily to:
The volume of natural gas in US and Canadian storage is a key metric as well. Storage supplements production in the winter to meet peak demand. When storage inventories are low, especially compared to prior year and the 5-year averages.
The Canadian price of natural gas is derived from the US NYMEX price and converted into Canadian dollars. Therefore, a weakening Canadian dollar will increase Canadian gas prices. A strengthening US dollar (compared to CDN) or a weakening Canadian dollar (compared to US) typically means that Canadians will spend more money on energy. Take the following scenario for example: assuming the price of natural gas is $8 US/ MMBtu and the Canadian dollar weakens from $0.84 US to $0.83 US, the Canadian price of natural gas would go from $9.03 CDN/GJ (8/(0.84 x 1.055056)) to $9.14 CDN/GJ (8/ (0.83 x 1.055056)). That’s an increase of approximately $0.11 CDN due to a penny decrease in the CDN dollar compared to US. Note that 1.055056 GJ’s is 1 MMBtu.