How to Use This Report

Natural Gas Section

The U.S. ran out of excess natural gas production capacity around the year 2000.  Prior to that time, production rates could be increased in the winter to meet higher seasonal demand.  Natural gas prices have both risen and become more volatile since 2000.  The U.S. has relied on imports from Canada to supplement domestic production.  However, Canada also has no excess production capacity.  Unlike crude oil, the U.S. cannot import enough liquefied natural gas (LNG) to meet the demand for low-cost natural gas.  The U.S. underutilizes its LNG import capacity because there simply is not enough LNG production capacity overseas to satisfy the world’s demand for LNG.

The market has responded to the lack of supply of cheap natural gas by reducing demand.  Some natural gas users that are extremely sensitive to natural gas prices have closed their domestic manufacturing facilities.  The fertilizer industry is a prime example.  Natural gas is a feedstock for fertilizer production and represents about 80 percent of the cost of producing fertilizer.

At the same time that the U.S. was running out of spare natural gas production capacity, about 200,000 megawatts (MW) of natural gas-fired power generation capacity came on-line.  This additional demand for natural gas compounded the already tight market for cheap natural gas.

Issues to monitor:

• The difference between the Henry Hub spot price (price of gas scheduled to be delivered the next day) and the NYMEX futures price (price of gas scheduled for delivery in future months) is based on different delivery dates, so the prices can vary.  These prices tend to converge toward the end of the month.
• Because the U.S. does not produce enough natural gas to satisfy its domestic needs, we have to rely on pipeline imports from Canada and LNG imports from other countries.  Like the U.S., Canada has the same difficulty maintaining its production.  The U.S. will become increasingly more reliant upon LNG imports to satisfy its natural gas needs as natural gas demand increases.  Construction of LNG regasification terminals in the U.S. and liquefaction terminals overseas is critical to meeting the projected demand growth.  However, the U.S. is not the only country that needs LNG.  Global competition for LNG will continue to intensify.
• Underground natural gas storage is used when production and consumption are imbalanced.  Production occurs at a relatively constant rate during the entire year.  When production exceeds consumption, natural gas is injected into underground storage reservoirs.  When demand exceeds production, natural gas is withdrawn from storage.  Normal storage levels are 3.1 trillion cubic feet (Tcf) at the beginning of the heating season and about 1.1 Tcf at the end of the heating season.  Deviations from normal storage levels can impact the price of natural gas.