Quick Read: Understanding the Impact of Natural Gas as a Commodity

Reading the futures of natural gas markets can feel as complex as deciphering ancient hieroglyphics — with even less comprehension. The truth is, more than 57 million American homes and millions more businesses (including quick service restaurants, convenience stores and supermarkets) use natural gas as a heat source. That makes it a commodity price that’s worth paying attention to, especially since its cost has fluctuated dramatically in the last several years.

Since this time last year, stockpiles and production of natural gas have increased significantly, with the former at its highest point since 1994 and the latter at its highest domestically since 1974. And while prices have been on the rise most of this year, the new glut is now causing the prices to drop, with the commodity known as liquefied natural gas (LNG), trading 45% below November 2008. (September’s trading value was even more dramatic at 75% below the same month last year.)

So what does this mean for American businesses and homeowners? According to one consultant, “We have more gas than we know what to do with in the U.S.,” said Stephen Schork in a recent interview with Bloomberg. Prices this winter will “gravitate toward, and remain closer to $4, rather than $7,” he added. Those prices mean the average homeowner using natural gas will face a heating bill of less than $800 this winter — with an even greater impact on budgets for businesses of every size.

That makes LNG the worst-performing commodity investment in 2009 and it doesn’t bode well for 2010, with no effort being made to control production. Again, while that may be bad news for investors, in many areas of the country it will translate into much lower costs for heating for businesses and consumers. The international inventory of LNG is so high at this point that the International Energy Agency is projecting the over-supply will last until 2012.

The supposition that you can budget for lower utility costs is, however, mostly conjecture, since a number of variables come into play here. First, Wall Street is continuing to forecast a 51% rise in U.S. gas futures next year. And individual states ultimately control prices that are passed on to businesses and consumers through a variety of public service entities.

Then it’s necessary to take into account the prediction of a colder-than-normal winter season in most parts of the country. If that occurs, demand for the commodity could cause prices to shoot up, according to Lawrence Eagles, a leading analyst at JPMorgan Chase.

Natural gas also continues to be promoted by governments, since it emits about half as much carbon dioxide as coal, making it a better bet in the fight against global warming. Low prices will save money for the 57 million American households using gas for heat, who face bills of about $792 each this winter. Governments and energy companies such as London-based BP Plc are promoting gas, which emits about half as much carbon dioxide as coal, to temper global warming.