Understanding Supply and Demand: Natural Gas

Natural gas production in the United States has been rising steadily since 2011. Over 90% of the increase in domestic natural gas production has happened in the seven most prolific shale formation regions, with the largest increases coming from Marcellus. While the states within those shale regions produce the highest volumes of natural gas, there is a broad area of production across the majority of the United States.

Gas storage levels also plays a key role when looking at supply side. Natural gas in storage provides a valuable cushion to meet peak demand. During periods of lower demand, surplus can be injected into storage facilities. The natural gas storage infrastructure can be utilized to accommodate sudden rises or falls in demand, up to a certain point.

Overall, natural gas supply is characterized as being quite responsive to a relatively wide range of prices. However, restrictions of the existing infrastructure impact additional flows, rendering the supply curve very inelastic even when prices are high. On the demand side, overall economic growth, weather and competing fuel prices affect gas demand. Here is a general breakdown of the demand of natural gas across the some of the main sectors.

Demand of Natural Gas

When it comes to electrical power generation, natural gas power burn has been increasing due to low gas prices relative to coal. The second largest sector is within industrial usage. Natural gas is used as raw material to produce fertilizer, chemicals, and hydrogen.

Residential and commercial sector utilize gas as a fuel for heating or cooling purposes. Natural gas suppliers are usually insulated from short-term fluctuations through existing tariffs. The transportation sector accounts for a small amount of natural gas used as vehicle fuel from liquefied natural gas or LNG.

Over the last few years, the United States has seen the development of new LNG exporting terminals, mostly in the gulf coast region. The demand for natural gas for LNG export to international markets is expected to rise significantly.

Natural Gas and Weather

Gas demand has a high price-sensitivity to changes in weather. Weather pattern changes are the primary contributor to gas price volatility. Gas prices also show a clear seasonal pattern with higher prices in fall and winter months in response to higher demand for heating. And lower prices the spring and summer months as demand drops.

Summary

When traders look at the supply and demand for natural gas in the United States, there are a variety of variables that impact the product, distribution, and use of this product throughout the year.