In this assignment, I am required to write an analysis of the main forces driving the market for any specific product of my choice. For me to successfully complete this task, I have to first pick a product, one that I am interested in, discuss the long term forces driving demand and supply, discuss the position of the main substitute products and producers, look at past data and explain what has occurred to change the price and finally will the producer be profitable in the future?
I have chosen Natural Gas. Natural gas is a vital component of the world's supply of energy. It is one of the cleanest, safest, and most useful of all energy sources. Despite its importance, however, there are many misconceptions about natural gas. For instance, the word 'gas' itself has a variety of different uses, and meanings. When we fuel our car, we put 'gas' in it. However, the gasoline that goes into your vehicle, while a fossil fuel itself, is very different from natural gas. The 'gas' in the common barbecue is actually propane, which, while closely associated and commonly found in natural gas, is not really natural gas itself. While commonly grouped in with other fossil fuels and sources of energy, there are many characteristics of natural gas that make it unique.
Long-Term forces driving Supply & Demand
Demand for natural gas has traditionally been high. Demand for natural gas depends on the time of year, and changes from season to season. In the past, demand for natural gas has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. The main driver for this natural gas demand is the need for residential and commercial heating. This has resulted in demand for natural gas spiking in January and February, and dipping during the months of July and August. While requirements for natural gas heating decrease during the summer months, demand for space cooling increases during this warmer season. Electricity provides the primary source of energy for residential and commercial cooling requirements, leading to an increase in demand for electricity. Because natural gas is used to generate a large portion of electricity, increased electrical demand often means increased natural gas demand. This results in a smaller spike in natural gas demand during the warmest months of the year. Thus, natural gas demand experiences its most pronounced increase in the coldest months, but as the use of natural gas for the generation of electricity increases, the magnitude of the smaller summer peak in demand for natural gas is expected to become more pronounced. In general, there are two primary drivers that determine the demand for natural gas in the short term. These include: •
Weather - as mentioned, natural gas demand typically peaks during the coldest months and tapers off during the warmest months, with a slight increase during the summer to meet the demands of electric generators. The weather during any particular season can affect this cyclical demand for natural gas. The colder the weather during the winter, the more pronounced will be the winter peak. Conversely, a warm winter may result in a less noticeable winter peak. An extremely hot winter can result in even greater cooling demands, which in turn can result in increased summer demand for natural gas. •
Fuel Switching - supply and demand in the marketplace determine the short term price for natural gas. However, this can work in reverse as well. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the capacity to switch the fuel upon which they rely. While most residential and commercial customers rely solely on natural gas to meet many of their energy requirements, some industrial and electric generation consumers have the capacity to switch between fuels. For instance, during a period of extremely high natural gas prices, many electric...
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