Natural gas prices under pressure on higher output and weak demand

Natural gas

Natural gas prices remain under pressure weighed down by record production, high inventory levels, and worries over industrial and heating demand.

Prices at the key NYMEX futures platform currently traded at a one-month low. However, it has been broadly choppy inside the $3.6 – 2 MMBtu levels throughout this year.

A similar volatile price action has been witnessed in the domestic futures and the European markets as well. A complex interplay of supply and demand dynamics largely affected the outlook of the fuel.

The United States is the largest producer of natural gas and the output from the country has been rising in the over the years. US gas output is currently higher than the five-year average. In 2022, US gas production grew by 3.6 percent to a new all-time high of 94.7 billion cubic feet per day.

Gas prices are highly poised to seasonal fluctuations. Storage and consumption volumes exhibit seasonal patterns on a regular basis due to high price elasticity. And gas inventory levels at the end of this refill season in the US stood at the second-highest level in the past five years. Higher-than-normal inventories at the start of the refill season resulted in less natural gas net injections compared with previous years as well.

Forecast of milder weather conditions across most of the US also dampened the sentiment. Colder temperature particularly in winter increases the heating needs and boost the demand for natural gas in the country.

In addition to the US markets, European markets also reported increased inventory levels. This has reduced the Eurozone’s need for additional gas supplies, affecting global market dynamics.

Nonetheless, consumption data suggest that demand is losing momentum, especially from major consumers. European demand in the first five months of the year fell by 10 percent. This was driven by lower residential and commercial usage in the first quarter and poor intake by industries in the second quarter.

International Energy Agency (IEA) data shows natural gas consumption in Asia eased by 2 percent in 2022 on a combination of slower economic activity, a warmer winter, and a steep rise in LNG prices. Meanwhile, US demand slightly improved during this refill season.

At the same time, the IEA predicted that China’s gas consumption will increase by 7 percent next year and its demand is set to increase strongly in the coming years due to the transition to cleaner energy sources. As the country already signed long-term contracts to ensure supply, it may become an increasingly dominant player in the global gas market in the coming years.

Looking ahead, a build-up in storage and sustained high production might continue to exert downside pressure on prices. However, prices remain highly responsive to weather forecasts. A colder temperature prediction for the winter season would lead to increased demand for heating purposes and thus higher prices of the commodity. Meanwhile, a forecast of weak demand and escalating production is likely to limit major rallies.

On the price side, the NYEX futures prices are most likely congested between $3.8 – 1.80 MMBtu levels initially, and breaking any of the sides would suggest a fresh short-term direction. In the domestic market, MCX futures have stiff resistance at Rs 270, consistent trades above the same are needed to trigger fresh rallies. Else, prices remain range-bound in a tight range.

First published in The Economic Times


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