Why has the Natural Gas Pricing Lost Balance?

Why has the Natural Gas Pricing Lost Balance?

Energy CIO Insights | Thursday, August 27, 2020

Natural gas prices are subjected to paradoxical fluctuations as the demand is high and there exist no more resources available for extraction. With smart market handling and stock management, the demands can be met by an environmental-friendly group.

FREMONT, CA: The largest expense of the data center is energy consumption. Hence, it is necessary for the owners or operators to understand the potential that exists for price volatility. The natural gas and electricity rates in the U.S have been stable for the majority of the year, until November 2018. The stabilized price band, which accommodated only a slight leeway, was hit with the highest demand in the last four years, due to the sudden reduction in the atmospheric temperature. The paradoxical rise in prices is dependent on various factors.

 As the prices of natural gas were stringently ranging in a very short band with negligible volatility, the immediate increase in demand gave way to almost 15 percent increase in its price due to insufficient resources.  The rise in prices of natural gas resulted in a similar surge in electricity prices.

The sudden occurrence of this phenomenon was examined to analyze its causal factors. The natural gas storage levels were recognized to be below average for most of the year, and the reduction of gas levels was identified to be at a five-year low.

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In the past, gas prices had risen significantly during a deficit in production. The market was accustomed to the unending supply of gas and possessed the confidence that any shortfalls in the supply would be made up with increased production. Due to the cold wave that hit the cities across the country, the notion was rendered false when the slippage in the supply of natural gas increased as the atmospheric temperature decreased. With the realization that natural gas resources were depleting, the volatility was reconsidered, and prices were again stabilized. 

Prices do vary substantially from region to region—areas such as the Mid-Atlantic sold natural gas for the lowest rates. Before the new shale gas discovery, the lowest prices for natural gas were in areas that were nearer to production or in regions catered by major pipelines. With the considerable gap in the variation of the prices, large natural gas users are subjected to re-configure their commodity pricing.

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With increased complexities and production to satisfy the evolving demands, it is highly likely to expect more phases where supply and demand are shot out of balance, thereby increasing volatility. In similar periods, the contracts and pricing quotes should be in terms of three to five years, and the stronger the consideration is given, the better the management of market and fluctuations are controlled. 

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