Natural gas is one of the favourite commodities for traders as its price swings gives them an opportunity to make handsome returns in a short period of time. Although there are risks associated with this, the momentum gives the commodity the much-needed attention most of the times. The cyclical nature of the commodity and the supply and demand factors, inventory situation, along with the climate changes play a dominant role for setting the price trend for this commodity.

Prices of natural gas have been volatile in recent weeks with the commodity rising eight per cent on Monday. Earlier, NYMEX natural gas prices has touched a high of $4.544 mmbtu in mid-November before heading downwards to $3.994. Inventory build-up in recent weeks coupled with moderate climate was the main factor that led to fall in natural gas prices.

Inventory situation To start with, natural gas inventories as on March 31, 2014 were 826 billion cubic feet, the lowest since April 2003. Since natural gas prices react largely on inventory positions, it becomes important how the injection season (which starts in April and ends in October) fares.

Heading into the injection season this year, producers of natural gas began stocking at a slower pace in April. However, in later months, producers quickly ramped up inventories and exceeded five-year average level for 28 weeks in a row till October 31. As on October 31, inventories were 3,571 billion cubic feet – a record increase of 2,734 billion cubic feet during the injection season.

These high level of injections happened because of relatively low gas demand from the electric power sector as well as substantial increase in domestic gas production. Mild summer temperatures led to low demand for air conditioning, which in turn helped to build the inventory. Report released from Bentek Energy, a US agency, for April-October 2014 indicated that consumption of natural gas averaged lower at about 2 per cent compared with the same period a year ago and also 16 per cent lower that the same period in 2012.

Production side On the supply side, there has been quite a revolution over the last few years in re-shaping energy supply scenario in the US. Ample supplies from shale gas have led to high natural gas production from lower 48 states this season too. According to the latest report from Bentek Energy, natural gas output in October 2014 was 6 per cent higher year-on-year and is the tenth consecutive record breaking month in 2014.

Natural gas production averaged 68.5 billion cubic feet (bcf) a day in this year’s injection season. This is 3.6 bcf/day higher than average production in 2013, which was at 64.9 bcf/day.

In the first six months of this season, production averaged 36.4 bcf/day, an increase of 15 per cent compared with the same period a year ago. The report further points towards a positive impetus on production side and estimates production to climb to 67.9 bcf in 2014, when compared to 55.1 bcf in 2009.

Outlook Although prices have corrected due to higher inventory levels along with rising production, prediction of a winter colder than normal in the US may likely lead to enhanced demand for heating. This will result in higher natural gas demand in the coming weeks.

On basis of the same, NYMEX natural gas prices (CMP: $4.27/mmbtu) can head towards $4.5 per mmbtu and MCX natural gas prices (CMP: ₹256/mmbtu) may touch ₹280 per mmbtu levels in next 1-2 months.

The writer is Associate Director –Commodity & Currencies, Angel Commodity Broking. Views are personal.

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