Energy Investing: Knowing Major Gas Drivers - dummies

Energy Investing: Knowing Major Gas Drivers

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

As an energy investor, knowing what factors affect the short- and long-term success of the U.S. gas industry is a critical part of making successful decisions. Here’s a discussion of what drives natural gas demand.

Natural gas demand is generally perceived to be cyclical because of its relationship to heating. Weather, as it turns out, is top on the list of short-term catalysts for natural gas. For the most part, a colder-than-average winter can portend stronger residential and commercial demand, while a hot summer can directly lead to higher demand in power plants.

It makes perfect sense, doesn’t it? People usually turn up their heat during the coldest months of the year. Conversely, they inevitably use less during the warm months of summer.

The temperature outside isn’t the only piece of this puzzle. Weather-related events are a major wild card because of their unpredictability. A particularly strong storm can be potentially devastating to a major production area, which everyone learned all too well during the 2005 hurricane season.

Prior to the devastating impact of Hurricane Katrina in late 2005, the United States was having a difficult enough time as natural gas demand outstripped supply. When the hurricane struck the Gulf of Mexico, it took out about 18 percent of annual U.S. production.

At the time, the Gulf Coast accounted for 40 percent of U.S. natural gas production. Prices skyrocketed from $8 to almost $16 per MMBtu in the three months after the hurricane made landfall.

Both Hurricane Katrina and Hurricane Rita caused gas supplies to remain much tighter throughout the winter heating season and showed how vulnerable the gas industry was to weather.

Along with weather, the economy can also play a significant role in driving demand. Strong economic growth gives demand a boost, including for industrial, residential, and electricity applications. A weaker economy inevitably erodes demand.