Natural gas accounts for almost a quarter of US energy consumption and is one of the most volatile commodities listed on exchanges. As the volatility comes with big rewards, it is one of the favourites among traders, investors and speculators.
While natural gas trades at different prices all over the US (and the world), speculative trading is concentrated around the Nymex delivery point, Henry Hub. Hence this commodity is immensely popular in the trading arena.
Seasonal patterns and cyclical demand are the most common features of the commodity, deciding the price trajectory. Temperature extremes have a bearing on natural gas demand.
In winter, frigid temperatures increase the demand for the commodity as heating requires natural gas. However, during summer, electricity is required for cooling.
The year 2015 (year to date) has not been good for this commodity as Nymex prices have lost their value by around 3.15 per cent while MCX gas prices have fallen 5.13 per cent in the same time frame.
In contrast, since the start of the summer season in the US (April-till date), Nymex natural gas prices have risen by around 6 per cent and MCX gas prices by around 7.43 per cent.
Climatic factorsProducers of natural gas have ramped up production this summer (April-November) adding 1,436 billion cubic feet of gas. The inventories are 20 per cent higher than the five-year average. However, it is 7.5 per cent lower than last year’s record high levels, supporting the price rise. The current natural gas inventory as on July 31 stood at 2912 bcf.
Climatic variations play a key role in the demand for natural gas, and temperatures this year have been warmer than normal, with cooling degree days totalling 755 in the period (April- July 31).
These temperatures were higher than the relatively mild summer last season contributing to increasing consumption of natural gas with a positive impact on prices.
Besides, the power burn has been averaging 27 bcf per day since the beginning of April, which is actually 18.4 per cent higher than last year.
According to the CFTC report (Commodity Futures and Trading Commission), money managers and hedge funds are continuously short on the commodity.
Net shorts at the start of the summer season stood at 2,27,000 contracts and rose continuously, making a high of 2,63,037 contracts as on June 9. As on August 4, money managers were net shorts at 2,13,305 contracts.
The bearish sentiment will continue to exert downside pressure on gas prices.
OutlookIncreasing power burn, as discussed earlier in the report, has been offset by higher production levels, allowing for robust injection of inventories this season. Weather conditions, according to the National Oceanic and Atmospheric Administration, is going to be mild and moderate in the second half of this summer (2015) which will reduce power consumption and make more natural gas available for storage.
Besides, the EIA report states that inventories in all the natural gas producing regions will be higher than the five-year average. It also forecasts that total end-of-October stock levels will reach 3,919 bcf, which will be 3.2 per cent higher than the five-year average.
Big inventories and bearish sentiment is a perfect set up for prices to decline this summer season. So far, it has not been too hot.
The power sector, which plays a more important role this time of the year, relative to other sectors, has kept the price of natural gas at its current low level.
Unless the weather starts to heat up again, the injections will continue to be higher than normal and prices will remain low.
We expect natural gas prices on the NYMEX (CMP: $2.83/mmBtu) to decline towards $2.5 by the end of October while MCX gas (CMP: ₹181/mmBtu) prices can trend lower towards ₹160 in the same time frame.
The writer is Associate Director - Commodities & Currencies, Angel Commodities Broking Pvt Ltd. The views are personal.