Commodities such as natural gas, electricity, other energies, precious metals, grains, etc., are all driven primarily by the supply/demand relationship, and secondarily by speculation by traders/institutions/market makers. We cannot really forecast or predict speculation, but we can attempt to track the factors that drive the supply and demand of commodities. To better understand the natural gas market (and electricity market, which is correlated to NG movements), we track the following 8 market factors:

Supply Side:
1. Canadian Imports
2. Liquefied Natural Gas (LNG) Imports
3. US Production
4. NG Storage

Demand Side:
5. Industrial Demand
6. Power Generation
7. Weather

8. Technical Outlook – charting NG futures and looking at indicators such as moving averages, convergence/divergence lines, resistance levels, etc.

Generally, anything that causes supply to increase, while demand remains stable or decreases, will cause NG prices to decrease. Anything that causes demand to increase, while supply remains stable or decreases, will cause NG prices to increase. In short, NG prices decrease when there’s more supply than demand, and NG prices increase when there’s more demand than supply.

As of March 26th, the following fundamental(s) are bullish:

• Power Generation
  • EIA forecasting a 2% increase in power demand for 2010, 1.5% increase in 2011
  • Coal fired generation giving way to NG fueled generation, cleaner burning fuel

The following fundamentals are neutral:

• Canadian Imports
  • YTD 2010/2009 increase of only 100k dth/day, demand due to extreme cold experienced this winter
  • Imports to remain depressed due to decreased Canadian production
• Weather
  • Despite below-normal temperatures of last couple of months, traders are looking past the end of heating season and towards to spring/summer periods
  • Above-normal temperatures expected for rest of March
• Industrial Demand
  • YTD 2010/2009 increase of only 200k dth/day (1.3%)

The following fundamentals are bearish:

• LNG Imports
  • Imports reached an all time high on Jan. 8 due to weather driven demand
  • Expected to rise 45%in 2010 due to new supplies from Russia, Yemen, Qatar, Indonesia, and Peru
• NG Storage
  • As of March 25^th storage report, total gas was at 1.626 trillion cubic feet, about 8.0% above the five year average
  • 11 bcf build was first injection of 2010
• Technical Outlook
  • Futures prices have not been able to breach major resistance level of $6.10/MMBtu
  • Recently broke out below resistance level of $5.00/MMBtu, then bounced off of $4.00/MMBtu the week of March 22^nd, finally falling into the $3.00/MMBtu range on March 25^th for the first time since September 2009
  • Speculators (non-commercial, about 60% of trading volume) are net short futures
• US Production
  • Total US gas rigs are only at 55% of the peak set in 2008, yet horizontal drilling rigs reached a new all-time record at 659
  • Production from shale gas formations has been able to offset production losses from conventional wells
  • NG production up 10.6% from 2007-2009, while consumption was down 1%

In summary, there are more bearish factors than bullish.  According to the EIA, rising LNG supplies, modest consumption growth, and robust domestic production are likely to keep a lid on prices.  Simply stated:

Oversupply of natural gas + recession + minimal consumption growth = anchor on NG and electricity prices

DISCLAIMER:  Past performance is not indicative of future results.  Electric prices are not 100% correlated to natural gas prices.  Geopolitical, economic, and weather related supply and demand spikes can significantly affect natural gas and electricity prices.