• Supply (production and imports)
• Demand (consumption)
• Other factors
• Gaz pricing mechanism
• Gaz purchase mechanism
• Definitions

A very strong crude oil contract has an upward effect on natural gas prices. Natural gas is a direct substitute to some crude oil products, which increases demand for gas due to industrial fuel switching. The Canadian Gas Association calculated that over the past decade daily natural gas prices have shown an over 71% correlation to crude oil prices and an over 83% correlation to the price of fuel oil.

Click to enlarge the picture In an environment where production is barely keeping pace with increasing demand, the general geopolitical situation worldwide can also influence natural gas prices. Worldwide terrorist threats have bolstered most energy prices as the perceived risk of supply curtailments due to sabotage has increased.  This will be more pronounced as North America relies more heavily on foreign LNG’s for domestic demand.

Another major price mover is the general consensus or inclination of traders or speculators in exchange markets. Short (where the trader has sold and is waiting for the price to decline to buy) or long (where the trader has bought and hopes the price will increase) positions are closely monitored. This explains why reaching “psychological” price levels are key triggering events that often lead to increased price momentum in a particular direction.

And of course, the all-important intangible and random “X” factor is uncertainty that seems to defy all logic or expectations. After all, if prices could be precisely forecasted, economists and traders alike would all be billionaires. Only the best-equipped market participants are correct more than 50% of the time in today’s extreme volatility.