Natural gas is a fossil fuel like oil and coal. It is often found together in the same deposit as oil. Gas is a major source of electricity generation. Many power plants run on gas. Furthermore the domestic use of gas is growing. In homes, gas is used mostly for heating and cooking. The usage of gas as a fuel for vehicle is becoming more attractive due to the high gasoline prices and the less damaging effect on the environment.
There are several parties active on the natural gas market. These parties range from producers, utilities, industrial gas consumers to shippers of gas.
The prices of gas are based on the balance between supply and demand. To get a keen understanding of the way prices are formed, both the demand and supply side of this equation will be explained.
The supply of natural gas can be influenced by many different factors. An unforeseeable factor is the scenario of an accident or disasters due to weather. In such a scenario the production will be cut and thus affect the price.
The availability of the required infrastructure will play a role in the way supply will be able to meet demand. With an increasing demand, the infrastructure, which transports this commodity, must be able to handle this increased traffic. When this demand appears to be permanent, new infrastructure may be build. This will however take time and thus the price will remain high until this projects is finished.
The import and export of natural gas between countries can play a role in the total supply of natural gas. In case of political unrest between two countries, the exporting country can take actions by cutting of the supply of gas. This will not only affect the neighboring country but also the countries that depend on their supply which runs through the country. Unlike many other commodities, natural gas must be transported through the pipelines which cross a country. Therefore an importer is not only depending on the exporter but also the other countries which hold the pipelines.
The demand of natural gas is influenced by a number of factors. The weather plays a role in the demand, because it is commonly used to heat buildings. Thus in cold weather the demand will increase.
Natural gas is more commonly used as a fuel to run electricity power stations. This increase in usage can be explained due to the more stable price of natural gas and the attractiveness of natural gas as a green source of fuel.
Due to the deregulation of the natural gas market, consumers have a choice who they want as their supplier. This has an effect on the price, because consumers will switch between suppliers for the best price. This way suppliers will need to compete with each other, thus the consumer have an impact on the price movements to a certain degree.
Due to the storage capacity, a sudden increase or decline in the demand can have limited effect on the price, because it can be easily stored. Also considering the weather effect during high temperatures, natural gas can be stored for colder periods.
The price of natural gas can be linked to the price of oil, due to multiple reasons. Firstly oil and gas are often found together. Therefore the energy companies would link the prices of both oil and gas together, so the producing of one fuel would not get the upper hand over the other fuel.
Because gas becomes more attractive as a substitute for oil, the prices of gas and oil are linked. To make sure the price of gas stays attractive, it is linked to oil prices and will change accordingly to changes in the oil prices. Some companies have the ability to use different types of fuel and therefore the linkage between the price of oil and natural gas becomes important. This way a company will make a decision which type of fuel to use.