Natural gas prices at multi-year highs, will demand grow further?

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Gas futures have been trading in a tight range since the start of the year as indecisive price actions moderated the overall volatility in the commodity

On the back of forecast of cold weather in the US, natural gas futures in the key NYMEX market shot to its highest levels since 2014 in November. Tracking gains in the overseas market, Indian natural gas futures too surged higher, gaining more than 25 percent.

Gas futures have been trading in a tight range since the start of the year as indecisive price actions moderated the overall volatility in the commodity.

NYMEX prices were stuck inside the range of $3.66-2.530 mmbtu (million British Thermal Units) since January, while it congested inside Rs 230-162 levels in MCX throughout the period.

The US is the top consumer of natural gas and their consumption is seasonal. US producers start to build inventories from spring season to meet the heating demand for winter.

These inventories usually start depleting during winter, which starts from November. A strong winter lifts the need for gas.

The recent forecast on cold weather in the US drove traders to buy more gas on the expectation of higher winter demand.

Changes in weather conditions and stock levels at various hubs usually dominate the price.

Earlier, traders were confused to take fresh positions due to higher production and sinking US inventory levels amidst ongoing trade disputes between the US and China.

Supply worries too supported the prices. Though stockpiles and production have been on the rise, the recent US stock reports show the weekly inventory levels were below the five-year average. Total stock levels were also falling in comparison with the same period, last year.

Demand from China, the third largest consumer of natural gas, buoyed the sentiments as well. Due to environmental issues, the Chinese government is taking measures to switch from coal to natural gas for industrial and residential end users.

Currently, the country follows some stringent policies to control air pollution on winter, like closing of large industrial plants and swapping residential heating to natural gas from coal.

As per China government mandate, at least 10 percent of natural gas must be used in their energy mix for power generation by 2020.

Presently, China is the world’s largest oil and coal importer and is soon expected to become the top importer of gas as well.

For the past several years, coal is losing its flavour and natural gas, as well as other renewables, are expanding their market shares.

Compares to coal, natural gas is less polluting and increasingly available. Though it is a fossil fuel, the emissions while burning natural gas is much lower, almost half percent when compared with coal.

After the shale gas boom in the US and consequent massive investment in LNG plants in the US and Australia, the availability of the commodity has increased.

As per the latest report of IEA, World Energy Outlook 2018, the agency forecasts natural gas demand would overtake coal and become the second largest energy source after oil by 2030.

The agency expects global gas production would grow further in coming years due to new production methods like hydraulic fracturing and fracking.

If the current weather forecasts in the US turn out to be true and the winter climate is more severe than previously expected, prices can surge more. In NYMEX futures, $5 would be an immediate upside obstacle, breaking the same would take prices much higher.

On the downside, $2.5 would be the key obstacle. In MCX, prices have upside potential till Rs 360 as long as Rs 240 holds downside.

First appeared in Moneycontrol

Posted: December 2018

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