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Natural gas prices can climb higher given supply and demand situation in two key export markets

The market is expecting intense heat over the next two months which potentially will push prices further towards the $5 level.

July 07, 2021 / 08:51 AM IST

US natural gas prices zoomed to a 30-month high while investors were busy following OPEC+ drama for crude oil as a rebound in domestic consumption and increase in exports of LNG pushed prices higher.

Strong demand and slowdown in supply have widened the storage deficit since the start of June. Storage deficit has nearly tripled from just 55 billion cubic feet per day (Bcf/d) as limited domestic supply struggles to keep pace with unexpectedly strong demand in summer.

In June, US production averaged 91 Bcf/d, up more than 4Bcf/d, or about 5 percent, from its year-ago level but still well below its pre-pandemic highs at over 96Bcf/d in late 2019 due to change in drillers' mindset to more disciplined production and shareholder-centric approach.

Revived export demand is likely to tighten the situation further as the US approaches peak cooling season.

Export demand surged with gas delivered to terminals averaging just over 10 Bcf/d, up nearly 6 Bcf/d from June 2020.

Close

Asian LNG prices have surged over $14 per million British thermal unit (mBTu), the highest price seasonally in around eight years.

Europe and the UK gas futures are trading at their highest levels in 15 years. Gas inventories in Europe remained at their lowest levels in 10 years, thus supporting prices and pushing them to a 13-year high, with gas prices in Asia already at their multi-year highs.

Efforts to build stocks in anticipation of demand for summer electricity and to prepare for heating demand next winter has increased the demand for LNG imports and supported high prices.

LNG stocks in Asia have been lower than usual this year as a result of significant draws during the extremely cold winter, demand in Asia for LNG imports has been much greater than usual.

Natural gas consumption is projected to remain moderate this year but the lower coal-to-gas switching levels can be a tailwind to the prices.

Power burn demand is starting to soften this year as higher prices lead to industries preferring coal over gas, thanks to higher gas prices and an anticipated uptick in gas-to-coal fuel switching.

Platts estimate power burn demand to average about 38.9 Bcf/d in July, down sharply from an average 44.3Bcf/d in July 2020, thanks to higher prices which have increased the gas to coal switching in industrial areas.

Industrial demand is also starting to hit an all-time high for this time of the year. With economic recovery taking place and more factories and plants opening up, there has been an improvement in industrial demand. This should be a tailwind going forward.

Total natural gas demand is projected to remain above last year's level as Mexico gas exports usually pick up around this time due to higher cooling demand.

Higher heating demand has pushed this figure higher but over summer months, we expect this year's power burn demand to match last year's despite historically low prices we saw last year.

Commercial power burn demand was lower and so with workers returning to their offices, the power burn figure could either match or exceed last year's.

Outlook

The market's expectation for intense heat over the next two months potentially will push prices further towards the $5 level as the medium-term weather forecasts begin to materialise and demand recovery will offset the steady production increase.

Given the supply and demand situation in the two key export markets — Europe and Asia, prices could go much higher.

Concerns: Higher Gas prices will lead to producers increasing their production late this year and next year.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Navneet Damani is the VP – Commodity Research at Motilal Oswal Financial Services.
first published: Jul 7, 2021 08:51 am

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