What Are the Key Factors Influencing Natural Gas Prices?

TradingKey - As a crucial energy source in the clean transition, natural gas prices are determined by more than just "supply and demand." Inventory levels reaching a bottom, rebounds in coal prices, and even an unexpected warm winter all play significant roles in influencing natural gas prices.

For investors, understanding the factors that affect natural gas prices and comprehending the interrelationship of these variables has become essential for strategic positioning in the energy sector.

Global natural gas supply is primarily dominated by the United States and Russia. Since the shale gas revolution began in 2007, U.S. natural gas production has soared. By 2024, U.S. production is projected to exceed 1 trillion cubic meters again, accounting for 25.5% of global totals and firmly securing its place as the world leader.

As a traditional powerhouse in natural gas supply, Russia's significance in global markets remains undeniable.

Despite the impact of Western sanctions, Russia's natural gas output is projected to increase by 7.1% year-on-year in 2024, reaching 629.86 billion cubic meters.

Natural gas demand is widely distributed across various sectors such as power generation, heating, and industry; however, demand characteristics and growth trends vary significantly from region to region.

How important is the supply-demand relationship? How does it determine prices?

The fundamental driver of natural gas prices comes from the basics of supply and demand.

Changes on the supply side, as well as fluctuations on the demand side, can have profound effects on market prices.

Impact of Supply:

Production cuts or increases from major natural gas-producing countries directly affect market supply.

For instance, if a major producing country reduces output due to policy adjustments or technical issues, market supply may tighten instantly, driving prices higher.

Additionally, the commissioning of new pipelines or expansions to liquefied natural gas (LNG) export facilities can also alter the supply landscape. The opening of new pipelines may increase natural gas supplies in a specific region, thereby alleviating market pressures.

Impact of Demand:

During periods of economic growth and prosperity, factories operate at full capacity, naturally increasing energy demand.

Natural gas demand also exhibits significant seasonal variations; heating in winter and cooling during summer represent two peak demand periods for natural gas.

The arrival of cold weather in winter significantly boosts heating demands, while high temperatures in summer lead to increased electricity consumption for air conditioning — indirectly driving up the need for natural gas power generation.

(Source: Freepik)

Take these examples:

Supply falls short of demand: In 2024, global natural gas demand hit a record high, while supply recovery lagged, creating a tight market.

Especially in the Asia-Pacific area, the increasing demand from industrial sectors has led to a rise in natural gas prices.

Supply exceeds demand: Natural gas prices at the Waha Hub in West Texas, U.S., frequently turned negative because production from the Permian Basin far exceeded transportation capacity to regions with higher demand.

Natural gas inventory data reflects the true state of market supply and demand, serving as a critical tool for investors to assess market trends.

Among the most authoritative sources is the U.S. Energy Information Administration’s (EIA) weekly natural gas inventory report.

What’s special about this report?

Every Thursday, the EIA releases data on the previous week’s changes in U.S. underground natural gas inventories.

The report covers multiple dimensions, including:

• Net changes in inventory levels,
• Comparisons with the same period last year,
• Deviations from the five-year average.

These figures not only illustrate the dynamic changes in U.S. natural gas inventories but also provide clear insight to determine whether the current market is oversupplied or undersupplied.

The relationship between inventory levels and natural gas prices can be summarized in a single statement: when inventory increases, prices fall; when inventory decreases, prices rise.

This inverse correlation is determined by the basic logic of market supply and demand.

When inventories are high, it indicates a plentiful supply of natural gas in the market, which typically puts downward pressure on prices.

In October 2023, natural gas inventories in European Union countries reached historical highs. Due to mild weather, winter heating demand was delayed, resulting in relatively ample market supplies. Consequently, natural gas spot prices (XNG/USD) dropped by 0.96% during early trading on October 24. This demonstrates the suppressive effect that high inventories have on prices.

Low inventory levels tend to push prices higher.

Consider the European gas crisis of 2021; due to summer droughts and low winds, electricity generation was impacted, leading to insufficient accumulation of natural gas inventories.

Additionally, worsening relations between Russia and Europe further exacerbated supply tensions as imports were hindered.

As of December 2021, the inventory level of natural gas had declined to 673 TWh (60.3%), down from 897 TWh the previous year (a decrease of 20.1%) and from 1030 TWh two years earlier (a drop of 32.6%). As a result, natural gas prices surged dramatically.

Extreme weather is a significant short-term variable in the natural gas market, especially during the winter and summer seasons, where its impact is particularly pronounced.

For instance, severe cold winters lead to a surge in heating demand, while hot summers increase the load for air conditioning. Extreme weather can affect the supply and demand dynamics of natural gas in the market, thereby influencing prices.

(Source: Freepik)

What Does Global Warming Mean for the Natural Gas Market?

If extreme weather represents short-term "storms," global climate warming is a slow but profound transformation.

It not only alters the demand structure for natural gas but also redefines its role in the future energy landscape.

As global climate warming progresses, average winter temperatures gradually rise, which somewhat suppresses traditional natural gas heating demand.

However, climate change also spurs new growth areas for demand.

For example, there is an increasing need for energy infrastructure in coastal regions and low-lying areas. Natural gas distributed energy systems are becoming a preferred solution in these regions due to their flexible, efficient, and environmentally friendly characteristics.

In recent years, renewable energy sources such as solar and wind power have developed rapidly, with costs continuously declining.

In regions with abundant sunlight and wind resources, the cost associated with generating electricity from solar and wind has fallen below that of natural gas. This means that in these regions, natural gas may gradually lose market share.

If breakthroughs are made in large-scale energy storage technologies, the stability and reliability of renewable energy will further improve, potentially reducing demand elasticity for natural gas.

When the prices of alternative energies are lower than those of natural gas, the market will shift to alternative energies.

Conversely, if prices for oil, coal, and other energy sources rise, natural gas—being a relatively cleaner and lower-cost source—will gain competitiveness in power generation and industrial fuel sectors. This increased demand can subsequently push up natural gas prices.

(Source: Freepik)

These influencing factors remind us that before venturing into natural gas investments, it's essential to grasp some key data points, such as inventory levels and alternative energy prices.

Learning to analyze changes in natural gas prices from multiple perspectives enhances risk recognition and response capabilities, facilitating rational investment decisions.