By Prathamesh Mallya
In September, natural gas prices on the NYMEX and MCX have declined by approximately 29 per cent.
The fall in natural gas prices has a lot to do with the demand and supply which is a very intrinsic factor which decides the price trajectory of the commodity. Moreover, the fall in the GDP in the recent quarter also contributed to the fall in the price of the commodity in the recent month.
Industrial consumption takes a back seat
The consumption of natural gas in the US industrial sector declined from 25.4 billion cubic feet per day (Bcf/d) in January 2020 to 20.1 Bcf/d in June 2020, according to the US Energy Information Administration’s Natural Gas Monthly.
ET CONTRIBUTORSGlobal economic slowdown, amid fall in consumption due to the lockdown on account of the pandemic led to the fall in industrial activity in the US, which in turn resulted in the lowest ever consumption of natural gas in May 2020, falling by 8 per cent compared with the same period in 2019. The year-on-year fall (May 2020) is also the largest decline since July 2009, (2007-2009 recession period). Although climatic conditions influence the demand and supply for the commodity, the price, the general economic conditions also influence the consumption of the commodity. Slowing the US economy further exacerbated the overall scenario as the GDP declined by 9.1 per cent in the second quarter of 2020.
Inventory remains comfortable; exports offer ray of hope
If we look at the storage (inventory) for the injection season (April-October2020), the average rate of injections into storage is 7% higher than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 10.6 Bcf/d for the remainder of the refill season, the total inventory would be 4,144 Bcf on October 31, which is 421 Bcf higher than the five-year average of 3,723 Bcf for that time of the year. Working natural gas stocks as on September 16 totaled 3,614 Bcf, which is 421 Bcf more than the five-year average and 535 Bcf more than last year at this time.
On the contrary, the US is now the net exporter of natural gas and the numbers clearly reflect this reality. In the first half of 2020, net exports of natural gas averaged 7.3 Bcf/d, or nearly 80 per cent (3.2 Bcf/d) more than during the same period last year. In the first six months of 2020, net LNG exports increased by almost 60 per cent (2.4 Bcf/d). According to the September 2020 Short-Term Energy Outlook, EIA forecasts net natural gas exports to continue increasing in the coming months primarily because of increasing US LNG exports.
Hedge Funds bet on Natural Gas
As seen in the chart alongside, money managers are increasing their bets on the natural gas in the recent weeks from net non-commercial shorts of around 97,485 contracts as on March 31, 2020, (time of the pandemic) to around 51,352 net longs as on September 15, 2020. It clearly shows the confidence that money managers are betting on the commodity.
ET CONTRIBUTORSMoreover, the ray of hope also comes from the chemicals industry, which consumes 40% of the natural gas used in the manufacturing in the US and is showing signs of progress, as per the data released from the EIA, Energy Information administration, US.
What next?
From the highs of $2.74/MMbtu on August 28, 2020 to the current lows of $1.79 on September 21, NYMEX Natural gas prices have significantly and drastically fallen. Looking at the momentum, the possible support zones for the commodity stands at $2.2 followed by $2, while on the MCX, the possible support zones for the commodity stands in the range Rs 180-185 per MMbtu.
Natural gas prices have more room to fall before we head into winter in the US. Climatic disturbances and hurricane season will be the key drivers for the commodity going ahead.
There is more room for correction from the current levels of Rs 210 levels as prices now are very close to resistance zones of Rs 220-mark. We see a possible fall in the commodity price towards the Rs 180 mark by the end of November 2020, before we see any further rebound. Hedge funds interest in the commodity and stronger winter in the US will be a good blend for the price moves going ahead.
Prathamesh Mallya is AVP Research, Non Agri Commodities and Currencies, Angel Broking Ltd.
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September 29, 2020 at 05:30PM
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Natural gas prices may continue to correct till November - Economic Times
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