Natural Gas Price Volatility Hinders Future Progress
Natural gas has long been considered the fuel of the future.
It is available in large quantities.
It has a complex infrastructure of pipelines, compressors and utilities to deliver massive quantities to consumers.
It has an exceptionally high energy content compared to other energy sources, such as coal.
It is produced in America by Americans, creating jobs and economic wealth.
Its major drawback: price volatility.
Natural gas first appeared on the scene as a major energy source about 20 years ago, but it took about 30 years before that to convince federal lawmakers of its value. Prior to 1978, the federal government controlled the prices of interstate gas sales, but intrastate gas (gas produced and consumed within the same state) was exempt from federal price controls and there was plenty of gas for the market intra-state but there was a shortage between states.
Members of Congress decided that the entire nation should have access to this wonderful resource and passed the Natural Gas Policy Act of 1978, which slowly deregulated natural gas prices, allowing it to flow freely across US borders. State.
In 1986, the New York Mercantile Exchange (NYMEX) began trading natural gas futures and forever changed the price structure of the industry.
In most cases, exploration companies drill the wells, produce the gas, and sell it to a pipeline company, which transports it to a utility for distribution to consumers. The exploration company and the pipeline negotiate a contract specifying the volume to be delivered and the sale price, which is usually based on an average price sold at NYMEX or another distribution point.
Natural gas prices are a function of market supply and demand. Increases in natural gas supply generally cause natural gas prices to fall, and decreases in supply tend to cause prices to rise. Increases in demand generally lead to higher prices, and decreases in demand tend to lead to lower prices. In turn, higher prices tend to moderate or reduce demand and encourage production, and lower prices tend to have the opposite effects.
Natural gas prices can also be affected by the amount of production and storage, economic growth and weather variations.
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Texas recently experienced historic low natural gas prices in April 2020 when spot prices repeatedly fell into negative territory because demand dropped dramatically during the COVID-19 lockdown. Barely a year later (February 2021), prices exploded during a winter storm that drove up demand and supply couldn’t keep up.
Natural gas peaked at the Houston Ship Channel at $400 per mcf on Feb. 15 and $375 per mcf at Katy near Houston. In West Texas, natural gas peaked at $204 at Waha on Feb. 15. Meanwhile, gas was trading at $2.91 per mcf on NYMEX that day and $23 at its Henry Hub delivery point in Louisiana. The price crisis started on February 12 and ended on February 21.
Natural gas is an incredible source of energy, but price volatility is a problem almost everyone is looking for a solution to.
Alex Mills is the former president of the Texas Alliance of Energy Producers.