Usually, short term increase in demand or decline in supply would cause large swings in natural gas prices especially during winter season
After hitting a four-year high during last November, natural gas prices have taken a breather on expectations of moderate US demand and normal supply.
Prices in the benchmark NYMEX futures nosedived from the November high of $4.99 to $2.49 by February this year, shedding more than 50 percent during this period. Similar decline was seen in domestic natural gas futures as well.
Extreme low temperature and a 15-year low inventory level in the US had earlier spurred concerns over supply that pushed prices higher.
The US is the world’s top natural gas consumer, primarily using the commodity for heating purpose in winter season.
US begins to build inventories from spring and these stocks usually start depleting during winter, which starts in November.
The forecast for an extremely cold weather during the last winter season drove US traders to buy more gas on hopes of higher heating demand. In addition, an unexpected drop in inventories too hit the trader sentiments taking prices to multi-year highs.
Meanwhile, the milder than usual temperature and ample global supply, overhauled the demand and tapered off most of its early price gains. Slow buying interest from top Asian players like Japan, China and South Korea also weighed on the sentiments.
Usually, short term increase in demand or decline in supply would cause large swings in natural gas prices especially during winter season. The US shale gas boom and a massive investment in LNG plants worldwide is making natural gas largely available.
As an eco-friendly energy, natural gas is now largely used by many countries for energy generation. Though it is a fossil energy, it pollutes less compared to other fossil fuels. The emissions while burning natural gas is much lower, almost half percent when compared with coal.
As per reports, the Chinese government has taken measures to switch from coal to natural gas for industrial and residential end users. China is the third largest natural gas consumer followed by Russia. The country is the largest importer of the commodity too. Similarly, Saudi Arabia is planning to replace the use of refined oil with natural gas for generating electricity and boosting domestic usage.
The country has a proposal to replace oil with gas for generating electricity by 2030. However, surprisingly, in India, natural gas’ contribution in the country’s energy basket has declined sharply as against the government’s plan to increase the usage of the super-cooled fuel.
On hopes of high future demand many major oil companies are currently aiming to be the big player in LNG as well. Saudi Arabia’s oil major Aramco aims to become the world’s largest natural gas player by eying plants in Russia, Australia, America and Africa. Similarly, US is also emerging as a large LNG shipper supported by its booming gas production from shale fields.
Looking ahead, the long term market outlook appears to be strong as higher demand from Asian countries are still on cards. Meanwhile, change in weather and inventory levels of the top consumer - US would guide the short-term price direction. However higher output from a raft of new projects are likely to overhaul the global demand and weigh prices later.
On the price front, a swift turnaround is least expected and prices are most likely to be held under the tight range of $3.4-2.5 mmbtu in the benchmark NYMEX exchange. In MCX, Rs 178 would act as an immediate support and Rs 240 likely to restrict major upside in the immediate run.
(The author is Head 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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