Natural gas price to remain under check

While global natural gas prices yo-yoed in 2014, the price of most of the fuel produced in India held steady at $4.2 an mmbtu so far. That’s because the new Government deferred raising the price of domestic natural gas twice. But things changed last Saturday, when the government announced a rate of $5.61 per mmbtu, effective November 1. This price, lower than what earlier reports suggested ($6-6.5 a unit), and much lower than what the Rangarajan Committee had recommended (about $8.4 a unit), will be revised on a half-yearly basis.

Domestic gas output in India has been slipping over the past few years mainly due to production woes at the KG-D6 basin of Reliance Industries. So, the country’s dependence on imported gas — liquefied natural gas or LNG — has been rising. From about 29 per cent in August 2013, the share of imported gas in the country’s total gas consumption rose to more than 35 per cent this August. Long-term LNG contracts linked with crude oil prices form the chunk of the country’s gas imports. But spot or short-term contracts are also significant, accounting for more than a third of the LNG imports.

Prices of the short-term contracts in Asia have fluctuated sharply over the course of the year, driven primarily by the demand dynamics of the two largest gas importing countries — Japan and Korea.

From more than $20 per mmbtu in early 2014 due to high demand and shortage of spot cargoes, spot LNG prices in Asia crashed to under $11 per mmbtu in June-July, a multi-year low. A less intense summer in Japan and restarting of nuclear plants in Korea dragged LNG demand, while increased supplies from big producers such as Qatar added to the pain.

Since then, Asian LNG prices have inched back to about $14-$15 per mmbtu aided by supply cuts and expectations of improvement in demand with the onset of winter. But upside in spot gas prices may be limited in the near term. One, the sharp decline in crude oil prices recently could give more bargaining power to gas importers to substitute among fuels and between term and spot gas contracts; this should help importers negotiate lower rates. Also, spot cargo supply seems adequate to meet winter demand in Asia.

In the US too, natural gas prices declined sharply this year. From a high of nearly $7.7 an mmbtu in February, thanks to increased demand during an unusually cold winter last year, the Henry Hub spot price has fallen to $3.7 a unit.

The natural gas futures contract traded on the New York Mercantile Exchange (NYMEX) has declined nearly 42 per cent from about $6.5 in February to $3.8 now. Record shale gas output in the country and a four-fold rise in inventories during the March-October storage period dragged down prices.

Data from the US Energy Information Administration shows that the natural gas inventory in the US surged to 3,299 billion cubic feet (bcf) as of October 10 from 822 bcf in March. Gas demand in the US is expected to increase in the coming months with the approaching winter season. But this year, the winter is forecast to be milder. This, along with continued growth expected in shale gas output and comfortable inventory position, should keep prices under check.

In the domestic market, the natural gas futures contract on the Multi Commodity Exchange (MCX) (which tracks the NYMEX contract) peaked at ₹402.7 per mmbtu in February.

It has since tumbled about 43 per cent to ₹231 per mmbtu now. Subdued US gas prices in the coming months should also reflect on the MCX contract price.

The sharp 44 per cent fall from the February high of ₹402.7 per mmBtu in the MCX-natural gas futures contract halted at ₹224.4 in August. Although the contract has been consolidating in a bull channel since then, it is struggling to rally beyond ₹250 levels.

Price action over the last two weeks has increased the danger of a fall below the immediate support at ₹229. A fall below ₹229 can drag it to₹215 — the 61.8 per cent Fibonacci retracement level or even to ₹203 — the 200-week moving average in the short-term.

Traders with a short-term perspective can initiate short position with a stop-loss at ₹251 for the target of ₹205. However, ₹203 appears to be a strong support and there is a high probability for this downtrend to halt near this level. A reversal can take the contract higher to ₹230 and ₹250 levels once again.