4 Little Known Factors Driving the Price of Natural Gas

Includes: GAZ, UNG
by: CommodityHQ

by Jared Cummans

Natural gas is not only one of the most vital energy sources in the world, but is also one of the most popular commodities. The fossil fuel is well-known for its large daily movements and heavy appeal as a trading and speculative instrument. Given the fact that natural gas is primarily a trading instrument, a firm grasp of its underlying price drivers are essential to smart trades. There are plenty of factors that combine to make up the price of natural gas, but some are lesser-known than others. Below, we outline four little known factors driving natural gas and its respective prices.

  1. Technological Developments: Natural gas is currently one of the cleanest sources of power available that utilizes hydrocarbons, a major reason for its widespread use. Some believe that fuel cell technology could ultimately become an even cleaner source of energy, but cost restrictions limit adoption at present. To the extent that fuel cell technologies become more cost efficient, demand for natural gas could decline. Note that this driver can also work in favor of natural gas, as new developments (like fracking) have made the commodity more accessible and allowed for widespread use. Many are calling natural gas the fuel of the future, but it will depend on how the technological landscape shapes out.
  2. Storage Reports: Like any commodity, natural gas is impacted by inventory levels. The Energy Information Administration releases a report at 10: 30 ET every Thursday detailing the current natural gas storage situation, and the price of the commodity often reacts to this data. Investors can almost always count on natural gas being most active on Thursdays and should always keep a close eye on the release; natural gas has been known to move upwards of 3% based on the significance of the storage data. It is important that you do not underestimate the impact of this release, as it has been known to turn the commodity on its head with little warning or notice.
  3. Hurricane Season: Weather is quite an obvious price driver of natural gas, as heat waves or extreme colds will drive demand for the fuel. But underneath the weather umbrella (no pun intended) comes hurricane season. Many investors underestimate the impact that hurricanes have on natural gas, but these natural phenomenons can provide lucrative trading opportunities. A number of natural gas supply points are located in the Gulf area as well as throughout the Southeast: prime locations for hurricanes. These massive storms have been known to knock out power as well as create a number of other roadblocks for natural gas production, causing prices to react swiftly. Always keep an eye on the storms developing and their paths as it could have a significant weight on the health of your positions.
  4. Regulatory Environment: Technological breakthroughs in recent years have given energy firms new tools for tapping into natural gas reserves, as a process known as hydraulic fracturing allows drillers to access natural gas stored in shale. But there have been concerns about the environmental impact of this process, and as more information is gathered it is possible that restrictions could be put in place limiting this practice. Eliminating this source of supply could have an impact on natural gas prices, so the regulatory environment should be monitored closely. Specifically, fracking has come under a lot of fire in recent months and years, as its impact on the surrounding environment has come into question (there is even a website dedicate to stopping fracking). Keep an eye out for any regulations or political movements concerning this commodity.

Disclosure: No positions at time of writing.

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