In September, Natural gas prices on the NYMEX and MCX declined by approximately 29 percent respectively.
The fall in natural gas prices has a lot to do with the demand and supply which is the intrinsic factor which decides the price trajectory of the commodity. Moreover, the fall in the GDP in the recent quarter also contributed to the fall in the price of the commodity in the recent month.
Industrial consumption takes a back seat
The consumption of natural gas in the US industrial sector declined from 25.4 billion cubic feet per day (Bcf/d) in January 2020 to 20.1 Bcf/d in June 2020, according to the US Energy Information Administration’s Natural Gas Monthly.
Global economic slowdown amid fall in consumption due to the lockdown led to the fall in industrial activity in the US, which in turn resulted into lowest ever consumption of natural gas in May 2020, falling by 8 percent compared with same period in 2019. The year-on-year fall (May 2020) is also the largest decline since July 2009, (2007-2009 recession period).
Although climatic conditions influence the demand and supply for the commodity, the price and the general economic conditions also influences the consumption of the commodity. Slowing US economy further exacerbated the overall scenario as the GDP declined by 9.1 percent in the second quarter of 2020.
Inventory remains comfortable. Exports of the commodity offers a ray of hope
If we look at the storage (inventory) for the injection season (April-October 2020), the average rate of injections into storage is 7 percent higher than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 10.6 Bcf/d for the remainder of the refill season, the total inventory would be 4,144 Bcf on October 31, which is 421 Bcf higher than the five-year average of 3,723 Bcf for that time of year. Working natural gas stocks as on September 16 totalled 3,614 Bcf, which is 421 Bcf more than the five-year average and 535 Bcf more than last year at this time.
On the contrary, the US is now the net exporter of natural gas and the numbers clearly reflect this reality. In the first half of 2020, net exports of natural gas averaged 7.3 Bcf/d, or nearly 80% (3.2 Bcf/d) more than during the same period last year. In the first six months of 2020, net LNG exports increased by almost 60% (2.4 Bcf/d). According to the September 2020 Short-Term Energy Outlook, EIA forecasts net natural gas exports to continue increasing in the coming months primarily because of increasing US LNG exports.
Hedge Funds bet on Natural Gas
As seen in the above chart, money managers are increasing their bets on the natural gas in the recent weeks from net non-commercial shorts of around 97,485 contracts as on 31st March 2020, (time of the pandemic) to around 51,352 net longs as on September 15, 2020. It clearly shows the confidence that money managers are betting on the commodity.
Moreover, the ray of hope also comes from the Chemicals industry, which consumes 40 percent of the natural gas used in the manufacturing in the US, is showing signs of progress as per the data released from the EIA, Energy Information Administration, US.
From the highs of $2.74/MMbtu on August 28, 2020, to the current lows of $1.79 on September 21, NYMEX Natural gas prices have fallen drastically. Looking at the momentum, the possible support zones for the commodity stands at $1.6 followed by $1.4, while on the MCX, the possible support zones for the commodity stands in the range Rs 100-110 per MMbtu.
Natural gas prices have more room to fall before we head in to winter in the US. Climatic disturbances and hurricane season will be the key drivers for the commodity going ahead.
We see a possible rebound for the commodity from Rs 100-110 mark to around Rs 150 per MMbtu mark by the end of November 2020. Hedge funds interest in the commodity and stronger winter in the US will be a good blend for the price moves going ahead.
(The author is AVP Research, Non-Agri Commodities and Currencies at Angel Broking.)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.