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Source: EIA Annual Energy Outlook 2011 - early release
Natural gas is a publicly traded commodity. The price of natural gas is influenced by the market forces of supply and demand. There are multiple factors that influence supply and demand and determine the wholesale price of natural gas.
The supply of natural gas is affected by production, storage and other factors.
Currently, 98 percent of the natural gas that is used in the United States is produced in North America. Much of this is due to the discovery of natural gas in the unconventional shale areas throughout the country and has been the primary source of recent growth in U.S. Shale gas has contributed to the growth in the natural gas resource base equal to about 100 years of consumption at current production levels. As a result, the good news is the long-term availability of natural gas supplies is sound and known reserves of natural gas are plentiful and sufficient for many decades to come.
Natural gas supplies held in storage play a key role in meeting peak demand. Storage levels (the amount of natural gas kept underground or in above-ground storage containers) are sufficient for the upcoming heating season and above average.
Events like hurricanes, record-setting crude oil prices, infrastructure problems, etc. can affect the ability to produce and transport natural gas. In 2008, Hurricane Ike affected production in the Gulf, where approximately 20 percent of U.S. production occurs. The 2009 and 2010 hurricane seasons, although very active in some areas of the country, did not disrupt production levels.
Factors such as weather, the economy and environmental concerns affect demand for natural gas.
National weather has the greatest impact on natural gas prices. When winter temperatures are colder than normal, demand is higher, usually causing an increase in natural gas prices. Conversely, warmer winter weather often means lower prices. For the summer months, when temperatures are cooler than normal, demand tends to be lower. When summer weather is hotter than normal, there is usually a spike in gas prices due to the demand for natural gas for eclectric power generation.
Economic activity plays a major role in influencing natural gas markets. As the economy improves, the increased demand for goods and services from commercial and industrial sectors generates an increase in natural gas demand. When there is a recession or limited economic growth, there is a decrease in demand leading to lower gas prices.
For the longer term, the demand for natural gas is expected to continue to increase due to the growing demand for low carbon-fuels.