- Markets & Risk Newsletter
|
||||
|
- Natural Gas Price Volatility In the past decade natural gas has exhibited increased price volatility on the commodity market and a corresponding increase in investment risk. Price volatility is defined as the annualized standard deviation of the percentage change between daily closing prices. It does not necessarily imply either high prices or low prices. According to the US Department of Energy, in 2007 US marketed production was 20.0 trillion cubic feet (Tcf). Who uses natural gas? As a percent of total consumer deliveries the electric power sector accounted for 32 percent of consumption, the industrial sector for 31 percent, the residential sector for 22 percent, and the commercial sector for 14 percent. Market prices reflect shifts in supply and demand, and in recent years natural gas prices have been particularly sensitive to short-term supply and demand shifts due to the highly inelastic nature of this market.
Inelasticity is characteristic of many energy commodities including natural gas, and is caused by several factors. As demand for natural gas shifts, significant lead time is required in order to bring additional domestic or foreign natural gas supplies to market and/or to expand pipeline capacity to alleviate transmission bottlenecks. Residential consumers are limited in their ability to switch fuel sources, and production infrastructure is operating near capacity Forces That Promote Price Volatility Natural gas prices are influenced by a wide range of forces, both on the supply side and the demand side. -Demand is seasonal, or more precisely, temperature-driven. A warm spell in January will drive down short-term demand; a heat wave in July will drive up demand. -Prices and market conditions for related fuels influence natural gas markets. In the United States, most baseload electricity generation is delivered from coal, nuclear, and hydroelectric power stations. Shifts in these fuel prices drive natural gas prices. -A highly active monetary policy may have a destabilizing effect on oil and gas markets, just as stable monetary conditions may contribute to stable oil and gas markets. Exchange rate movements have a significant and negative effect on the demand for oil and gas. A depreciation of the U.S. dollar exchange rate may stimulate world demand for hydrocarbons. -Price volatility reflects a lack of substitutability. Many consumers have capital equipment constraints that do not allow them to substitute fuels as prices rise, forcing them to pay the higher price and dampening the reduction in demand that is normally associated with higher prices. -Economic activity influences natural gas markets. When the economy expands or contracts, the shifting demand for goods and services from the commercial and industrial sectors generates a shift in natural gas demand. The industrial sector, which is the leading consumer of natural gas as both a plant fuel and as a feedstock for many products such as fertilizer and pharmaceuticals, is a leading agent of price change. -Supply disruptions can be caused by severe weather, operating mishaps, or planned maintenance. For example, in the summer of 2005 hurricanes along the U.S. Gulf Coast caused more than 800 billion cubic feet (Bcf) of natural gas production to be restricted between August 2005 and June 2006. -Natural gas prices tend to be more volatile when reserves are either higher or lower than normal. -Technical trading and the impact of speculators on short-term markets can influence prices and increase volatility.
Due to the wide variety of market forces that are difficult to predict and impossible to control, even a commodity as simple as natural gas can exhibit substantial price volatility and investment risk. For information on powerful risk-management tools that allow you to track and measure the risk of energy markets, including natural gas, contact PortfolioScience today. |
© 2000-2009 Portfolio Science, Inc. | ||
|
The RiskAPI® Add-In
Version 3.4.2 Now available.
|
|
|
What's New
Click for all new items: More |
|