Higher US gas production has been a major factor weighing on gas price.
Natural gas has witnessed sharp volatility in the last few days, and this could continue as market players assess the demand outlook for the high-demand winter season. Natural gas surged to a February high of $2.905/MMBtu earlier in November but corrected almost 14 percent to hit a low near $2.5/MMBtu .
Price rallied earlier in November as severe cold weather engulfed parts of the US Eastern and Central regions, resulting in higher heating demand. Natural gas has, however, corrected on higher US gas production and doubts about the sustainability of the cold weather.
Natural gas slumped nearly 5 percent on November 25 even as weather forecasts pointed to cold storm in US Western region. As per the US National Weather Service, a ‘historic’ storm is heading towards southwest Oregon and northwest California on November 25 and 26. The Commodity Weather Group said that a blast of cold air seen pushing across the western US over the next five days would not bring an intense chill to the East.
Natural gas speculators have amassed huge short positions in the last few months as higher US gas production kept the US market well supplied. The rally earlier in November was largely due to short covering as the cold weather boosted heating demand. The US CFTC data shows that speculators cut net short position for three consecutive weeks to a six-week low of 121,088 contracts. Aggregate Open interest for NYMEX natural gas futures stood around 1.21 million contracts at the start of November but fell to 1.157 million by the middle of the month. OI has, however, risen back to 1.19 million this week.
We may see more such instances of short covering. However, it may sustain only if we see a long spell of cold weather in the US this winter season. Winter is a high demand period for natural gas as cold weather increases demand for heating fuels. Natural gas’ price is, however, trading almost 40 percent less than what it was in the same period in 2018 and 25 percent less than the five-year average, which shows skepticism about price outlook.
Higher US gas production has been a major factor weighing on gas prices. Based on Bloomberg estimates, the US natural gas production reached a record high level of 96 billion cubic feet per day over the weekend. The US Energy Department expect natural gas production to rise further. Nevertheless, the US natural gas rig count has dropped to December 2016 lows.
Also, pressurizing price is robust US gas stocks. US working gas stand at 3638 billion cubic feet which is 16 percent higher than stocks in the same period in 2018.
(The author is 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.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.