What are the major factors affecting natural gas prices?
Natural gas prices are mainly a function of market supply and demand. Because there are limited short-term alternatives to natural gas as a fuel for heating and electricity generation during periods of high demand, changes in supply or demand over a short period may result in large price changes. Prices themselves often act to balance supply and demand.
Factors on the supply-side that affect prices include natural gas production, net imports, and storage inventory levels. Increases in supply tend to pull prices down, while decreases in supply tend to push prices up. Increases in prices tend to encourage natural gas production and imports, and sales from natural gas storage inventories. Declining prices tend to have the opposite effects.
Factors on the demand-side include weather (temperatures), economic conditions, and petroleum prices. Cold weather (low temperatures) increases demand for heating, while hot weather (high temperatures) increases demand for cooling, which increases natural gas demand by electric power plants. Economic conditions influence demand for natural gas, especially by manufacturers. Demand may be moderated by petroleum fuel prices, which may be an economical substitute for natural gas for power generators, manufacturers, and large building owners. Higher demand tends to lead to higher prices, while lower demand can lead to lower prices. Increases and decreases in prices tend to reduce or increase demand.
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Last reviewed: June 1, 2021
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