How is natural gas priced?


Quick Answer

Natural gas is priced in accordance with the market supply and demand factors. The three most important factors that affect the price include the amount of gas being purchased, the transportation cost and the amount of processing required to prepare the gas according to the buyer’s needs.

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Full Answer

Due to the large amounts of gas that companies purchase, they pay the lowest price, also known as the wellhead price. Homeowners pay the highest price, also known as the residential price, because they buy small amounts of processed gas that is transported through a distribution system. Natural gas is also priced according to the specific business sector in which it’s sold, such as the electric power sector in which companies use natural gas to produce electricity, and specific markets, including the Henry Hub and future prices.

There are three factors related to the supply that modify the price, including the volume of imported and exported gas, variations in the natural-gas production and the amount of natural gas located in storage facilities. Factors related to demand include the variations in summer and winter weather, the level of economic growth and the oil prices, the effect of which varies in different regions. The supply factors are inversely proportional to the price, meaning that an increase in supply decreases the price, whereas the demand factors are directly proportional.

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