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How much is natural gas selling for, and what factors could affect that price over the next year?
The best place to look to determine the price is the Henry Hub, a natural-gas pipeline in Erath, La., which serves as the official delivery location for futures contracts on the New York Mercantile Exchange. Owned by Sabine Pipe Line LLC, the Henry Hub is able to access many of the major gas markets in the United States.
The Henry Hub spot price determines the price point for natural-gas futures and is used as a benchmark for the North American natural-gas market.
As of Jan. 17, natural gas was selling for $4.39 per million BTU, or British Thermal Unit, according to the U.S. Energy Information Administration.
The price of natural gas varies from day to day, but since December, the Henry Hub spot prices have been in the low-to-mid $4 range.
Like anything else, the price of natural gas is a function of supply and demand.
“Because of limited alternatives for natural-gas consumption or production in the short run, even small changes in supply or demand over a short period can result in large price movements to bring supply and demand back into balance,” the EIA said on its website.
Changes on the supply side include variations in the amount of production, the amount of gas being imported or exported, and the amount of gas in storage facilities, according to the EIA.
For an example of supply-side disruption, let’s look at what happened to the Henry Hub spot prices around the time of Hurricane Katrina in August 2005.
Prices spiked for months after the storm, going as high as $14 the week of Dec. 9, 2005.
The devastating storm disrupted the production and distribution of natural gas.
Disruptions can occur on the demand side, as well. They include economic factors, oil prices and variations in the weather.
The obvious example this time of year is cold weather drives up consumption and demand for natural gas, which is used to heat homes.
During an unusually cold November, prices topped out at $3.85. And during a brutal December when temperatures fell below zero, the price went as high as $4.61.
Conversely, hot temperatures can affect prices in the summer cooling season.
According to the EIA, about 30 percent of U.S. electricity is generated by natural gas. Hotter-than-normal temperatures can increase the demand for air conditioning. That increases demand in the power sector for natural gas, and that, in turn, raises prices.
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