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Last Updated : Nov 23, 2019 08:15 AM IST | Source: Moneycontrol.com

Increased supply outlook and healthy storage situation may pressure natural gas prices

Gas prices are highly sensitive to seasonal differences. Prices usually stay firm during winter on expectations of increased heating and power demand.

Moneycontrol Contributor @moneycontrolcom

Hareesh V

After testing an eight-month high of $2.91 mmbtu, natural gas futures in NYMEX platform traded down on expectations of moderate winter demands and high inventory levels. An increased supply outlook, too, hit the sentiments adversely.

In NYMEX, the losing streak since the start of November took prices to $2.50 per mmbtu, shedding more than 13 percent. Less chances of a colder-than-normal temperature across the US prompted traders to take a bearish bet on the super-cooled fuel. On the domestic market, the most active MCX futures declined from a high of Rs 205.90 to 179.20 during this week.

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Gas prices are highly sensitive to seasonal differences. Prices usually stay firm during winter on expectations of increased heating and power demand.

The US is the top consumer of the natural gas. When the summer ends in October, the US weather turns colder and requires more energy for household heating. Natural gas is one of the major heating sources. Hence, any change in demand-supply dynamics makes prices extremely volatile during this period. However, the seasonal swing in prices was moderate so far in 2019.

As per EIA (US Energy Information Administration), residential and commercial heating demand of natural gas in the US was higher in the start of November. The daily average consumption surged to 30 Bcf against a year-ago level of 24 Bcf. Meanwhile, a large build-up in inventories balanced the market sentiments.

Currently, the US gas inventories are placed well above the five-year average and are 18 percent more compared to 2018. Usually, gas prices and inventory spread move in opposite directions. A decline in the inventory spread is a positive price factor for natural gas and vice versa.

The output of the US, the top consumer of the commodity is at record high and is expected to keep growing. Leading exporters like Australia and Canada continue to experience growth for the last many years, making the commodity cheaply available. Meanwhile, the demand for the energy is subdued in 2019 after experiencing several years of consecutive increase. The demand from China, the third largest consumer, would weigh on the sentiments. A decline in manufacturing activity across the country due to trade conflict with the US influenced the trend.

As eco-friendly energy, gas is now largely used by many countries for energy generation. A shift from coal plants to natural gas for electricity generation likely to perk up the demand later. But, a higher supply may offset such increased demands.

The supply growth of natural gas continues to far outpace the rising consumption. An increased shale oil production resulted in higher gas output as well. Oil from shale formations comes with associated gas which needs to be either burned or shipped.

Present supply dynamics tends gas prices to trade lower. Robust production, downbeat global economic activity and healthy storage situation would pressure prices on a long run. A possible higher global consumption due to switching coal to clean energy like natural gas perhaps push demand in the long run.

However, a short-term recovery in price cannot be ruled out due to the peak season. Reports of colder-than-normal temperature or any unexpected shortage in inventors would take prices sky highs. On the price front, NYMEX supports are placed at $2.5 and $2.1 levels and resistance is at $3 per mmbtu. In MCX, a congested trade inside Rs 208-169 levels initially expected, breaking any of the sides would suggest fresh direction to the commodity.

(The author is Head of Commodity Research at Geojit Financial Services.)

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.

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First Published on Nov 23, 2019 08:15 am
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