How Does Weather Impact Energy Prices?
Commodity markets in general are very volatile, and natural gas prices, specifically, are no exception. And weather is one of the main drivers for that volatility. Natural gas is primarily used as a heating fuel during the winter time. So, when we have a very harsh or cold winter, demand for natural gas as a hidden fuel increases quite a lot. That can create some shortage situations in the market and push prices much higher. Conversely, if we have a very mild or warm winter, then a lot of that demand never materializes, leaving excess gas in the market and pushing prices down.
Summer weather is beginning to have an impact on prices as well. Natural gas is now the number one fuel used for power generation in the United States. A couple years ago it displaced coal in that first position. If we have a very hot summer, we see demand for air conditioning increase, of course, which in turn increases demand from those power generators to run their power generation stations. As demand from that sector increases, it creates tighter market situations and adds support to prices. The converse is true there as well.
There is evidence of this in the recent past. Look at these examples!
2009 – 2010 Winter: Record Snowfall
That was a very cold winter with record snowfall levels in many parts of the country. That, of course, increased demand for natural gas to heat homes, and prints and shortages, again, pushing prices all the way up to $6 per mmbtu.
2013 – 2014 Winter: The Polar Vortex
We saw record cold temperatures in some parts of the country that winter and other parts of the country saw a 20-year low temperatures. Again, it increased that demand for heating fuels and pushed prices much higher.
2018 – 2019 Winter: A Cold November
We had a very cold winter in November of that year. The low temperatures combined with very low natural gas storage levels, that pushed prices pretty high going into the start of winter, but then coming into December, and January temperatures were milder and so prices came right back down with it.
January 2020: Record Warm Winter
More recently, we’ve seen prices remaining really low below $2 for each use since January. The largest driver for that was the winter of 2019 to 2020, which was one of the warmest winters on record. That left a lot of excess gas in the market, which stayed in storage. So we’ve had very high storage levels throughout most of the year, which has kept prices under pressure as well.
Not only do domestic weather patterns matter for natural gas prices, but increasingly, weather in other parts of the world are starting to impact US gas prices as well. Because the US has grown so much as a natural gas exporter, it is now one of the number one exporters in the world of liquefied natural gas LNG) so that now weather patterns and key demand areas such as Europe and Asia are starting to also have an impact on US natural gas prices.
For example, in the Winter of 2019 through 2020, not only the US but also Europe and Asia saw very mild winters, which left storage levels in both regions higher than normal. This left prices in those regions also much lower. When prices are much lower in other parts of the world, that makes it more economical for many US exporters to send their gas abroad. If that gas isn’t getting exported, then it stays in the domestic market, which brings even more oversupply, contributing to a low price environment.
Conversely, if we see a very harsh winter in Europe and Asia, it will increase demand for gas there, so those regions will want more US gas to be imported to help them. This provides an additional outlet for US gas and can help support prices.
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