Natural Gas Pricing

With an ever increasing demand, a finite amount of fossil fuels, and a dwindling supply, the global natural gas and oil markets are experiencing marked rises in prices over the past year. In addition to this, a number of factors such as political unrest and instability in certain parts of the world, a dwindling number of drilling sources, and the growth of the Asian economies have combined to fuel a sharp increase in the prices of natural gas. Natural gas pricing is also affected by the changing preferences of consumers around the world. For example, while many European consumers in particular have expressed concerns over rising prices, Indian consumers have in recent times shown a preference for cheaper fuel. As a result, competition between the leading players in the global natural gas and oil market has intensified.

Natural Gas Pricing
National Geographic Society

Driven by supply and demand principles

Natural gas pricing, like other commodity markets, are driven by supply and demand principles. However, natural gas pricing can also be affected by the cost of oil and other petroleum products, particularly in continental European countries. The European Union (EU) has recently made a decision to introduce a new trading system that will allow its member states to trade in one currency, namely Euro, while supplying natural gas in the form of LPG in another currency, namely British pound. This measure is expected to reduce the burden of imported oil and gas by up to $80 billion per year by the end of the decade. However, the sudden fall in the prices of LPG and other commodities could dampen the effect of the introduction of the European trading system, which could in turn have a knock on effect on natural gas pricing.

Sudden drop in prices of natural gases

A number of factors are believed to have had a hand in the sudden drop in prices of natural gases. Among these, the increasing efficiency of technology used in extracting natural gas from the ground and the introduction of new technologies that reduce the cost of drilling for natural gas have been said to be the causes. In addition, the increasing price of oil, which has increased costs and shortages of the commodity in the past, may also have been a factor behind the hike in natural commodity prices.

However, there are indications that the price level of natural gas could go even lower as the European Union may decide to increase its quota for the export of gas from Britain. Furthermore, the European Union’s decision to introduce a common price level across its member states has caused the cost of some natural gas products to drop. It is believed that the introduction of a single price level across the EU may result in a competition among suppliers to attract customers and reduce their costs. This, in turn, could help reduce the gap between the cost of production of natural gas and its price. A closer look at the supply chain of natural gas and its price determination can help you understand why natural gas supplies are increasing despite of this downward trend.

Three important price factors

There are three important points that you need to understand and relate to your business to determine its impact on natural gas pricing. Firstly, the price level of natural gas determines the amount that you pay for installation and equipment to extract it from the ground. Moreover, your monthly consumption bill, the size of your transmission lines, and your consumption habits all affect the price level of natural gas. Lastly, demand, the number of units that are being used in a particular area, and climate all have an effect on the price level of natural gas. Understanding each of these three factors can help you take decisions for your company to adjust to fluctuating market conditions.

In essence, natural gas pricing is affected by several factors. When you are planning for a future deal with a supplier, you will have to be aware of how each factor affects the overall cost of your purchase. For example, you may find that the recent rise in the price of natural gas is directly related to increasing demand in certain geographical areas. Another aspect that will have an effect on your natural gas pricing is the type of infrastructure you have in place and the efficiency of your production plants. All of these things can have an impact on your overall cost of production.