ANALYSIS OF NATURAL CONSUMPTION IN THE EARLY 2014

By Horacio Braez

Statement
According to the US Energy Information Administration, natural gas prices edged above
$5 per MCF in early 2014, prior to retreating back into the general range of prices
observed since 2009. Provide an explanation. Conclude with a forecast of natural gas
market conditions over the next 5 years.
Background
With colder-than-normal temperatures in January-2014 through March-2014, residential
and commercial demand for natural gas increased, raising prices at most trading
locations. The increased demand also led to record-breaking natural gas storage
withdrawals at the beginning of the year 2014. In particular, the combination of high
demand and continued pipeline constraints into the Northeast contributed to record-high
prices in New York (Transcontinental Pipeline's Zone 6 NY) and New England during that
period, which were often three or four times higher than the Henry Hub as is shown in
the following pictures.

Source: U.S. Energy Information Administration, based on Natural Gas Intelligence (NGI)

Analysis of demand
Based on the lecture, it can be consider that demand for natural gas depends highly on
the time of year, and changes from season to season. In the past, the cyclical nature of
natural gas demand has been relatively straightforward: demand was highest during the
coldest months of winter and lowest during the warmest months of summer. The main
driver for this primary cycle of natural gas demand is the need for residential and
commercial heating during the coldest months. This has resulted in demand for natural
gas spiking in January and February, and dipping during the months of July and August.
In fact, the following pictures shows the main consumption for natural gas in winter
period is made by the Residential and commercial sectors, which achieved al 50% in the
las winter period 2013-2014. It ca also be inferred that the consumption of natural gas
has increased over the time from 2011 until the present. The increasing demand reflects
a growing up portion in the residential sector as in the total consumption.

Analysis of supply
According to the lecture, there are several factors on the supply of natural gas, which
include natural gas production, net imports and underground storage levels. Additionally,
the capacity to transport natural gas from producing regions to consumption regions also
affects the availability of supplies to the marketplace. This infrastructure can only
transport so much natural gas at any one time.
Over the past five the supply of natural gas has increased significantly as is shown in
the following picture for the contribution of shale gas.

Analysis of Market Equilibrium

As frigid temperatures led to higher natural gas demand in the 2013-14 winter, recordbreaking weekly storage withdrawals occurred, driving storage levels below their fiveyear minimum. Prices at the Henry Hub approached $8/MMBtu, and during the threemonth period were on average 48% higher than in the same period during 2013.
In New York and New England, prices spiked during periods of peak demand, largely as
a result of persistent infrastructure constraints. During the first three months of 2014,
prices at Algonquin Citygate (serving Boston) and Transcontinental Pipeline's Zone 6 NY
(which serves New York City and is also known as Transco Z6 NY) were often three or
four times higher than the Henry Hub, with Algonquin and Transco Z6 NY reaching record
levels of $77.60/MMBtu and $120.75/MMBtu, respectively, in January. During January
and February the spot natural gas price at the Algonquin Citygate hub averaged
$23.42/MMBtu.
Prices at the Chicago Citygate, which even in winter are normally in line with Henry Hub,
also spiked in response to the severe winter weather. On January 28, one of the coldest
days of the year, Chicago Citygate reached a 10-year high of $33.23/MMBtu.
The winter cold caused spot prices to increase in western regions as well, with PG&E
Citygate (California) and Northwest Sumas (Washington) prices both moving up in early
February to $24.55/MMBtu and $24.52/MMBtu, respectively.
Increases in supply tend to pull prices down, while decreases in supply tend to push
prices up. In the other hand, the decreasing in storage inventories and limitations in
infrastructure increase also the price.
Forecast
Based on the Annual Energy Outlook 2014 published by the U.S. Energy Information
Administration (EIA), the projection of natural gas prices depends on many factors,
including macroeconomic growth rates and expected rates of resource recovery from
natural gas wells. Higher rates of economic growth lead to increased consumption of
natural gas, primarily in response to their effects on housing starts, commercial
floorspace, and industrial output. In the High Economic Growth case, higher levels of
consumption result in more rapid increases both in depletion of natural gas resources
and in the cost of developing new production, pushing natural gas prices higher. The
converse is true in a low economic growth case. In the High and Low Economic Growth
cases, the price rises by 4.0%/year and 3.5%/year, respectively, compared with
3.7%/year in the Reference case as is shown in the following picture.

Source: Annual average Henry Hub spot prices for natural gas in five cases, 19902040 (2012 dollars per million Btu)

Although the current pipeline infrastructure is significant, with the EIA estimating daily
delivery capacity of the pipeline grid to be 148 Bcf. However, natural gas pipeline
companies must continue to continually expand the pipeline infrastructure in order to
meet growing demand.
Additionally, the International Monetary Fund (IMF) has forecast the natural gas prices
until 2020, which keep below $us/MMBTU 5. This is mainly based in the increasing
reserves of shale gas for the next years.