Why Natural Gas Prices Are Plummeting

By Nora Fiore , last updated January 28, 2012

Economy commentators sigh with relief when a phenomenon’s primary explanation actually presents itself through a cause as obvious as the weather. Such is the case with the recently transpired drop in natural gas futures to decade record-setting lows. Have you noticed that you don’t need to bundle up or shovel snow as much as you might have last winter? If so, you’re in good company, since the comparatively clement winter has obviated the need for the fuel-consumption that keeps residents toasty.

Although some forecasters expected another white, frigid winter like the blizzard-driven 2010-2011, the actual mildness has significantly reduced the demand for the natural gas that makes up the bulk of heating expenses. And the weather shows no sign of a cold snap: the National Oceanographic and Atmospheric Administration predicts a similarly temperate February which is good news for your gas bill, but bad news for natural gas in general. As you’ll remember, when demand decreases and supplies are steadily increasing, prices drop. This paradigm, in a nutshell, accounts for the record lows that you can’t miss in a Google search of natural gas commodities.

Those Fracking Surpluses!

No, it’s not a new swear word coinage. Fracking refers to a technologically advanced hydraulic process that enabled natural gas companies to access staggering reserves of the commodity which had been previously bottled up in shale. Yet, with demand on the downswing, this glut-increasing technique only adds insult to injury. When one takes into account the fact that a slumped economy tends to use less fuel than a healthy one, the surplus and the plunging prices make still more sense.

What about Non-American or Overseas Buyers?

The United States possesses a bulging surplus of gas at the moment (pun definitely not intended) and the industry suffers from extreme lows in pricing. Meanwhile, Japan, for instance, in the wake of its nuclear meltdown, craves those resources and natural gas holds a premium over there. You might ask what’s going on and why global demand does not alleviate the problem of a national overly replete supply. The answer lies in policies that govern how much natural gas gets sent to which destinations and by which companies. Rather than step into that morass of regulations and red tape, you can understand the essential knot of the situation thanks to this thorny passage from the Department of Energy’s website, “Section 3 of the Natural Gas Act (NGA) prohibits the import or export of natural gas, including liquefied natural gas (LNG) from or to a foreign country without prior approval from the Department of Energy (DOE).” So, don’t expect natural gas prices to rise thanks to export demand, at least not without a major amendment to a piece of legislation first drafted in 1938.

Then Why Did Big Players Buy So Much?

The plummeting gas prices should come as something of a slap in the face to fuel giants like ExxonMobil, who spent extravagant sums in acquiring gas commodities, and prognosticators of fuel shortages. However, they maintain their sly poker faces and look as though they’d tap the sides of their noses if it didn’t sacrifice their financial dignity. The pundits and high-stakes finance players maintain that they’re playing for the long term and, hence, do not despair at a market upset. This article makes no such claims to clairvoyance, but when natural gas prices, low and likely to keep on dropping, bottom out, the fuel will offer a promising investment to anyone interested in commodities and happy to bet on future energy scarcity. It’s not a bad bet.

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