US gas price has fallen over 18 percent since the start of the year reflecting the weaker sentiment.
NYMEX Natural gas price plunged 5 percent on February 10 and hit the lowest level since March 2016 weighed down by bearish factors both in domestic and global market.
In the US, weaker winter related demand and robust gas production has kept market well supplied. Winter is a peak demand season as cold weather increases demand for space heating. The winter season is now nearing an end and we have still not see a sustained spell of cold weather.
As per American gas association data, the US weather during the October-February first week period has been 7.3 percent warmer than last year and 8.7 percent warmer than normal for this time of the year. Weaker demand is evident also from the fact that gas prices are currently 32 percent down from same period last year.
On the supply side, US gas production remains robust, however, the pace of growth is slowing down. As per Bloomberg data, gas production last stood at 91.3 billion cubic feet per day, up 4.7 percent from same period a year ago. Drop in rig count also shows that production interest is weakening. The number of rigs drilling for natural gas fell to 111 rigs last week, lowest level since October 2016.
Amid weaker demand and robust production, stock decline has been below average so far this season. US working gas stocks stand at 2609 billion cubic feet which is 30.8 percent higher than stocks same period last year and 8.3 percent higher than 5-year average stocks for this time of the year. At start of the withdrawal season in November, stocks were 1 percent higher than 5-year average stocks.
With well supplied domestic markets, US is looking at more avenues to export the excess gas. Lower price in international market, concerns about Chinese demand due to virus outbreak and import tariffs has however dented outlook. UK gas prices has slumped to August 2009 lows amid weaker winter related demand and robust supply.
The virus outbreak in China has turned out to be a major health risk and has also affected economic activity. With restrictions in place to limit the spread of virus, demand for fuel has fallen sharply in China and this has led to sell-off in crude oil and gas prices. Demand outlook has weakened further as China is struggling to control the virus spread. Amid signs of chaos in the region, China National Offshore Oil Corp. declared force majeure move as it struggled to take delivery of LNG because of constraints caused by the virus. Royal Dutch Shell Plc and Total SA didn’t accept the legal grounds for the move.
China last week announced that it will halve import tariffs on $75 billion US goods with effect from February 14, however the 25 percent duty on US LNG remains unaffected. Higher tariffs will further make US LNG less attractive for Chinese markets.
US gas price has fallen over 18 percent since start of the year reflecting the weaker sentiment. This situation is unlikely to improve significantly unless we see a major drop in US gas production or pick up in global demand.
(The author is VP - Head Commodity Research at Kotak Securities.)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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