Natural gas price volatility, long a key selling point for the coal industry, which has relatively stable pricing, is waning in the North American gas market, said the U.S. Energy Information Administration in its Nov. 20 Today in Energy feature.
North American natural gas markets generally exhibit seasonal variation, with higher prices in winter because of increased heating demand. This seasonality of prices can be seen in natural gas futures contracts traded on the New York Mercantile Exchange.
Over the past four years, the spread between the natural gas price for delivery in February and for delivery in November has decreased from an average of 65 cents/MMBtu in October 2010 trading to an average of 24 cents/MMBtu in October 2013, EIA noted. The price spread represents the market’s expectations of prices in the peak winter month, compared with prices in an autumn month, with a lower spread indicating less expected seasonal variation.
Several factors, said EIA, contributed to the reduction in seasonality in natural gas markets:
- Increased gas production, particularly in consuming regions like the Northeast, has put less strain on the supply needed to be withdrawn from storage. Net withdrawals from inventory decreased during the winter of 2012-13 compared to the winter of 2010-11, despite higher levels of consumption and lower net imports.
- Gas displacement of coal for electricity generation has reduced seasonality of power sector gas use. However, when natural gas markets tighten, coal-fired power plants become more economically competitive than some natural gas-fired plants, releasing gas to be used by other customers, EIA said.
- Consumption in November through February as a share of yearly natural gas consumption has decreased from 41% in 2010-11 to 39% in 2012-13, demonstrating that gas consumption is increasing in other months of the year for other uses, such as power generation in the summer.
- Natural gas storage working capacity increased 2% in 2012.
The declining price spread suggests that market participants expect less seasonal variability in gas prices compared to previous years, EIA added. However, the eventual price will often be determined more by supply and demand when the physical gas is sold.
“Regardless of what short-term factors affect the natural gas price, long-term trends continue to reduce the seasonality of natural gas markets,” EIA concluded. “The market for future year contracts currently reflects lower seasonal variability than in the past.”