While oil prices are finding upward resistance at $60 per barrel, the price of natural gas, the main alternative to oil as a source of energy, is surging ahead.
Natural gas prices jumped by over 5% on Monday as a result of greater U.S. demand.
Natural gas (NGN15, +.90%) prices for July increased by 13.9 cents, or 5.1%, on the New York Mercantile Exchange. The price settled at $2.889 per million British thermal units, the standard unit for natural gas price quotations.
Prices are generally governed by the market forces of supply and demand, the norm being either under supply or excessive demand driving prices higher. The higher than usual price adjustment in natural gas prices is the result of fears of an under supply situation arising together with an expected spike in demand.
The Supply Side
The changing global climatic conditions are very much a factor in the current situation. A report from AccuWeather.com on Monday said that the weather system over the Gulf of Mexico could well develop into a tropical storm before moving over Texas on Tuesday, bringing more heavy rains to an area already suffering from flooding.
Weather patterns in the Gulf of Mexico affect energy production negatively in the region and this of course includes natural gas production. The expectation of a lowering in production in the short term was the one driver for an increase in July prices.
The Demand Side
Natural gas demand has always been seasonal, with an increase during the cold winter months when more home heating is required followed by a decline in the warmer months. This scenario has been somewhat skewed with more and more electricity generating plants switching to natural gas as the fuel of choice to generate electricity.
The weather factor once again comes into play with the changing weather patterns that have been experienced globally. The National Oceanic and Atmospheric Administration (NOAA) reported that the eastern parts of the U.S. experienced the coldest weather since 1935 while the western areas recorded the warmest weather on record. AccuWeather.com on the other hand forecasts that summer temperatures will be higher during 2015, with a larger number of +90-degree days.
The net result of these weather patterns means that an increase in the use of electrical cooling units during the expected warmer than usual summer months will result in an increased demand for natural gas. At the same time, there is the expectation of lower production, resulting in a double impact on price levels going forward.