Natural gas prices set to recover

The year 2016 has not been a good one so far for natural gas as an asset class; MCX gas prices have declined by about 18.5 per cent.

This makes natural gas the worst performer in the non-agri commodity space.

Prices have fallen owing to a combination of low demand, warmer-than-normal temperatures in the US, historically high production despite the lowest rig count, and a build-up of inventories, which have not depleted overmuch during the winter season in the US.

As on March 11, the rig count of natural gas in the US is at a record low of 94; it is the first time in the 29 years history of compiling rig data that the count has fallen below 100.

Although the rig counts have declined, production has grown steadily in the past few years owing to drilling efficiency.

The dry production of natural gas declined by 5.4 per cent in 2015 from the previous year; it is projected to be flat in 2016, and to rise by 2.1 per cent in 2017 (y-o-y) as new pipeline projects come online in the US.

Even during the winter season in the US (October-March), natural gas inventory withdrawals have been significantly low. Since the start of this year, inventory withdrawal from storage was at 1,165 billion cubic feet, substantially below the historical average.

Gas stocks as on March 11 are at 2,478 bcf or 67.4 per cent and 48.3 per cent above the year-ago and five-year (2011-15) average levels, respectively. Natural gas storage inventories are 998 bcf higher than last year’s levels.

This is on account of low demand as a consequence of warmer-than-normal temperatures in most parts of the US.

Temperatures have been higher than normal since the beginning of 2015-16 heating season; this trend can be observed in 16 out of 19 weeks. Heating degree days –– a measure of the intensity of demand for natural gas –– have been 15 per cent below normal for most of the heating season, further pressurising prices.

According to Energy Information Administration estimates, working gas storage is poised to end the heating season at near record high levels.

However, EIA also expects total US natural gas consumption to increase.

The US consumed an estimated 75.5 bcf per day of natural gas in 2015; consumption is expected to average 76.6 bcf per day in 2016 and 77.2 bcf per day in 2017.

During the winter gone by, natural gas pricescontinued its downward spiral for the most part, and the incremental consumption was low. For decades, coal has been the dominant energy source for generating electricity in the US.

However, according to the EIA’s forecast, 2016 will be the first year that natural gas-fired generation will exceed coal generation in the US.

This will be a boost for natural gas prices for the rest of year.

Over a three-month timeframe, we expect natural gas prices on the NYMEX (CMP: $1.895/mmBtu) to trend higher towards $2.2, while MCX gas prices (CMP: ₹126/mmBtu) can go higher towards ₹150.

The writer is Associate Director – Commodities & Currencies Business, Equity Research & Advisory –Angel Broking. Views are personal.