Learn About Futures Insider For November 10, 2011: Natural Gas (Part 2)

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Part 1 : Learn About Futures Insider For November 10, 2011: Natural Gas (Part 1)
Unrefined natural gas is primarily composed of methane – up to 90 percent in some cases – but can also contain ethane, propane, butane, carbon dioxide, oxygen or nitrogen. Nearly pure methane is considered “dry” natural gas while the presence of hydrocarbons, as the name implies, means it is “wet”. In processing, mercaptan is added to natural gas to give it the sulfur-like odor for safety in leak detection. Gas is collected in storage tanks and added to pipelines when required.

**Data courtesy of EIA
Natural gas can also be chilled and stored as a liquid for transport and export. This Liquid Natural Gas (LNG) is turned back into gas and added to pipelines at destination. The following chart displays the three largest natural gas producers in terms of gross production:


**Data courtesy of EIA

Price highlights for this market include:
* Starting in 1960, prices for natural gas from the wellhead were regulated by the Federal Power Commission. By the late 1970s, deregulation was a hot topic in the industry. Federal price regulations for interstate sales had a ceiling of around $1.42 per thousand cubic feet in early 1977.
* In 1989 legislation passed to end price controls through 1993. At that time, news outlets reported that industry officials were predicting strong gas demand growth through the 1990s. At this point futures prices spiked above $2.00 per mmBtu.
* Hurricane Andrew caused damage that halted natural gas production in 1992, shifting what some analysts were calling a depression in gas prices. Prices that year had seen a low just above $1 per mmBtu turn into highs well above $2 per mmBtu. Prices continued to find support above that $2 level as natural gas vehicles appeared on the scene and gas led the way in alternative fuel demand.
* 1996 saw spikes in prices led partially by inflation, as well as persistent cold weather forecasts. Frigid temperatures in Texas and Louisiana were seen as a threat to production, while cold weather in other parts of the US increased consumption. At the end of 1996, prices had jumped to fresh highs closing above $4.50.
* In December of 2000, cold weather forecasts and dwindling supplies caused another sharp spike in prices, this time hitting fresh highs around $10. Shortages and power alerts would grab natural gas headlines throughout the early 2000s.
* Damage from Hurricane Katrina in August of 2005 would send gas prices soaring. When Hurricane Rita came later that season, the production issues were exacerbated and prices reached highs above $15 per mmBtu. Hurricane Ike would cause damage to Gulf production in 2008, bumping prices back towards $14 before they retreated through the end of the decade, back below $5 per mmBtu. Increased supplies, production and domestic drilling have kept prices in single digits through 2011.

Key terms for this market include:
British Thermal Unit (BTU) - the amount of energy it takes to increase the temperature of a pint of water by one degree Fahrenheit.
Liquid Natural Gas (LNG) - natural gas that is converted to liquid for easier transport. It is achieved by cooling the gas to negative 260 degrees Fahrenheit.
Henry Hub - a site where several interstate and intrastate pipelines intersect in Erath, Louisiana.

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