Natural Gas Consumption, Opportunity For Commodity Traders
With world energy prices at record levels, the future trend for natural gas consumption will be of interest to those keen to gain exposure to the commodity markets.
Market expectation is that the energy commodity prices including natural gas will remain high for the foreseeable future because of strong global demand, particularly from Asia, and restricted world supply.
The challenge is on to find new reserves so as to maintain the balance between natural gas consumption and supply, with current worldwide reserves in 2008 estimated to last for just over 60 years .
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Just see how a growing number of countries, including the USA and UK, are looking to invest in more distribution infrastructure and port terminals to accept delivery of liquefied natural gas (LNG) supplies from the main producing areas.
In the US, the imported LNG supplements the domestically produced natural gas mainly in New Mexico, Wyoming, Texas, Oklahoma and Louisiana.
Within this total there was wide variation, with particularly strong demand growth in the Middle East (81%) to 299 bcm in 2007, and 83% growth in Africa but only a 5% increase over the decade to 801 bcm for North America.
The Asia Pacific region which Includes China and India recorded a 78% increase to 448 bcm over the ten years to 2007, with China now accounting for 2.3% of overall global demand, while India makes up 1.4% and Japan 3.1%.
When we consider the rates of economic growth in China and India, there is very likely to be a significant increase in natural gas consumption in these countries going forward.
In 2007 the biggest consumer of natural gas was the USA, consuming 653 bcm (22.6%) followed in second place by the Russian Federation with 439 bcm (15%). With a number of regulations and restrictions removed from well head prices, the market for gas in many developed nations is now determined by market forces of supply and demand.
Natural gas is sold as a commodity and the price is either based on what it costs to buy today, called the spot price, or on a future determined time. The latter is called the futures market and contracts to buy and sell can be from one month to 36 months into the future.
Commodity traders will buy and sell natural gas futures contracts on either NYMEX, for North American supplies, or on ICE Futures Europe, based on delivery in the UK.
Pricing for natural gas is determined by the supply and demand at different pipeline locations called hubs, which is where the network of interstate and intrastate pipelines intersect. There are over 30 of these hubs in the US, and the main one called Henry Hub, in Louisiana, is the basis for the NYMEX futures contract.
Short Term
Long Term
The Energy Information Administration (EIA) estimates that residential demand in the US (which consumes 22% of natural gas in the US) will increase 25% between 2002 and 2025.
The biggest driver of this demand will be the installation of heating appliances in new homes which are planned to be built over the next 20 years or so.
A rise in gas prices for electricity generation will make this energy source more expensive for retail consumers and so they will switch to natural gas.
In the US, if the population in the northern states continue to move to the warmer southern states you may find demand patterns shifting, so that there is a higher demand for summer cooling than for winter warming.
In Europe the main supplier is the Russian Federation, which boasts the highest natural gas production worldwide and it also has the biggest natural gas reserves in the world. Some European states consume more than others and Germany and Italy are particularly dependent on supplies from the East, while the UK, also a big consumer, imports most of its needs from Norway, Qatar and Algeria.
Natural gas consumption patterns may vary slightly over time, but it seems for the foreseeable future, as both developed and developing economies shift away from reliance on crude oil, the trend will be for demand to remain strong for this equally crucial commodity.
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