Natural Gas Prices in the U.S. for Commercial Use Girdhar Agrawal Dr. Weaver AGBM 420

Transcription

1 Natural Gas Prices in the U.S. for Commercial Use Girdhar Agrawal Dr. Weaver AGBM 420

2 Assignment #3: Demand Drivers: 1) Prices of Crude oil, West Texas Intermediate Dollars Per Barrel URL: 2) Net Demand for Natural Gas, Henry Hub, LA Dollars Per Million Cubic feet (BTU) URL: Supply Drivers: 1) Natural Gas reserves, Henry Hub, LA Billion Cubic feet storage URL: 2) Natural Gas Production Million Cubic feet URL: 2

3 3 Table W3-1 Supply Side Drivers Demand Side Drivers Year Price Production Imports Total Supply Consumption Exports Total Usage Difference Reserves Production Crude Oil Prices Net Demand Ending Stock Source:, URL:

4 4 Figure 1: Time vs Price Price Time (years) Source:, URL: Figure 2: Crude Oil Prices vs Natural Gas Prices Natural Gas Price (Million Cubic Feet) Crude oil prices per barrel Source:, URL:

5 5 Figure 3: Reserves vs Price 14 Price (Per Million Cubic Feet) Reserves (Billion Cubic feet) Source:, URL: From figure 2, we can see that as crude oil prices increase, the prices for natural gas increase too. This is due to the fact that they act as substitutes. Hence, a crude oil price increase would increase the demand for natural gas. This in turn would raise the prices for natural gas too, as production is fixed in the short run. From figure 3, we can see that as the reserve increases, the prices increase. This could be due to added demand for natural gas. As population increases, the demand for heating and cooling systems increases. This in turn increases the demand for natural gas as it is used in home heating systems and in electricity generation. This could also be the reason behind exploring for new reserves.

6 6 Figure 4: Prices vs Time Prices Series2 Series Time Source:, URL: Discussion: In figure 4, the series 3 represents the price of crude oil over time. Series 2 indicates the price of natural gas and series 3 indicates the relative price of the two commodities. The relative price is defined as ($/millbtu)/($/per barrel). This essentially compares the price of one unit of natural gas to one unit of crude oil. From the data, we can see that relative prices have decreased since This is because the price increase for crude oil have outstripped the price increases for natural gas. This has made consuming natural gas relatively cheaper. This is probably the reason behind the large demand increase for natural gas in the past few years. The increasing demand has also led to higher reserve accumulation via exploration for natural gas reserves.

7 7 Table W3-2: Product: Natural Gas (Commercial Use) Current Supply Drivers Reserves Prior Year prices Other Components Of Demand Imports Prior Leftovers Current Demand Drivers Price of crude oil Price of natural gas Weather Conditions Other Components Of Demand Economic Conditions Brief description & Units Amount of natural gas in reserves. Measured in billion cubic feet. Prior years prices, help producers determine production levels. Prices per Million Cubic feet. Amount of natural gas imported every year. In Million Cubic Feet. Amount of unused natural gas from pervious year. Leftovers in Million Cubic Feet. Price of crude oil per barrel. Dollars per Barrel Price of natural gas per million Cubic Feet. Average temperature across the country. Degrees Fahrenheit. Business cycles, market conditions. Recessions etc. Market growth rate and inflation. Sign Of Effect More reserves usually leads to more supply Higher past year prices lead to more production usually Higher imports increases domestic supply Higher leftovers from prior year increase domestic supply Higher crude oil prices lead to higher demand for natural gas (Substitutes) - Higher prices lead to lower demand - Higher temperatures lead to lower demand and vice versa Better economic conditions increase demand Data Source