Natural gas prices in 2010 and projection to 2011

2010 is over and now we must start looking forward into 2011 and do some forecasts… Before we will put 2010 to rest, let’s shortly review some trends in 2010 regarding natural gas spot price, consumption and storage. This analysis could provide some perspicacity into what do we have to look for in 2011.

Natural gas spot price

When reviewing the year in Natural gas market, it seems that its price underperformed, since there was a downward trend during the year.  Specifically, natural gas spot price (Henry Hub) fell from an average price of 5.832 ($/MMBTU) during January to an average 4.25 ($/MMBTU) during December, and during October it reached a bottom average price of 3.434 ($/MMBTU).

In the following natural gas price chart for 2010 is the average monthly prices that show the trend I’m referring to.

natural gas price chart 2010Source: EIA website

One way of explaining this downward trend is to check the natural gas supply and demand during 2010.

In the following table I present the U.S. natural gas consumption on a monthly scale in MMcf (green columns) and the monthly Lower 48 States Natural Gas Working Underground Storage in billion Cubic Feet (red columns), for Jan-Oct 2010.

Natural gas storage and Natural gas consumption 2010Source: EIA website

The table shows that the while the consumption level did fluctuate year round, it didn’t varied much as the difference between the high (October) and low (February) is 14%, however the natural gas storage has risen very sharply since March and reached 3,821(bcf) in October.

It seems that as natural gas storage rose, natural gas price fell because of the lower friction between demand and supply; as supply was abundant on the one hand, and demand while rising, didn’t rise substantially on the other, this could offer a sound explanation for the decline in natural gas spot price during most of the year.

Perhaps natural gas price was very high to begin with on a multi year scale? Let’s see:

Here is a natural gas price chart for the years 1997-2010 on a monthly scale, in which Jan 1997=100.

natural gas price chart 1997-2010Source: EIA website

The chart shows that the price range during 2010 doesn’t seem high on an historic level. You can also see that there were several times in which natural gas spot price rose very substantially, and yet during does times it didn’t necessarily have anything to do with the natural gas market per say and more to do with speculation around adjacent markets, e.g. during 2008 in which the crude oil market was gushing and petroleum prices were high, natural gas, an energy commodity related to oil (to some degree), peaked as you can in the graph above.

What can we expect during 2011?

For one thing, seeing that the natural gas storage level is currently high in the U.S. it does reduces the friction between supply and demand and the pressure to a price hike decreases. Unless there will be another unexpected rise in consumption, there shouldn’t be much of a price rise in the near future.  Also consider that all the huge gas fields found in the U.S. in the last year, some estimate at 2,200 trillion cubic feet will help keep reducing the price of gas from rising.

As the year will progress, however, we will have to be vigilant to see how other markets, such as the oil market, could affect the natural gas, as it seems that they could have a much stronger and volatile effect on natural gas spot price than the actual shift in supply and demand for this energy commodity.

For further reading (in this site):

3 comments for “Natural gas prices in 2010 and projection to 2011

  1. sammy
    January 1, 2011 at 11:42 pm

    how far up will gas go this year

  2. mario
    January 2, 2011 at 12:56 pm

    What will be average natural gas price for 2011?

  3. admin
    January 2, 2011 at 5:06 pm

    If I would to speculate, I think that the current price level, in which the Henry Hub is at, seems high: since there are vast reserves of NG in the US as I have shown above, and the cold weather will subside in the next several weeks, then we should see a downward trend of NG price reaching below 4 $/MMBTU and probably settling around 3-3.5 $/MMBTU during 2011. This scenario excludes, of course, an unexpected energy crisis, such as a war in the Middle East, in which case it will hike all energy prices including NG.

    Of course, this is no investment advice and just my humble opinion.

Comments are closed.