Report on Natural gas | Globe Capital
24-Jan-2023
Report on Natural gas

Natural gas prices have witnessed steep downside movement as its prices have dropped more than 55 per cent in nearly past two months amid oversupply in US and lower demand . In near term extreme weather events can cause price spikes and volatility in natural gas prices. Prices can witness some short covering near current levels if it sustains above 320 further upside towards 360-400 can be seen in medium term. While downside support lies near 240-230 levels.

Overview and Outlook

Natural gas prices have witnessed steep downside movement as its prices have dropped more than 55 per cent in nearly past two months amid oversupply in US and lower demand  . Natural gas prices were hovering nearly $7.2 in NYMEX and nearly 600 in MCX in the last week of November 2022. Since then prices have halved and currently hovering near $3 in NYMEX and nearly 260 in MCX on decline in demand amid warmer weather forecasts. Much of the 2022 demand increase came from the chemical sector and the manufacturing sector. Chemical sector accounts for 29% of the total gas consumption, the largest in the industrial sector. Also, the spread between Europe and U.S. Fear of supply disruption due to Russia and Ukraine war, Supply outrages, rising coal prices rise in heating demand contributed to spurt in gas prices in first half of 2022. Europe’s gas consumption declined by more than 10% in the first eight months of 2022 compared with the same period in 2021, driven by a 15% drop in the industrial sector as factories curtailed production. The demand in China and Japan remains unchanged in that same period while contracting in India and Korea.

In near term extreme weather events can cause price spikes and volatility in natural gas prices. Meanwhile, investors continue to monitor the situation at the Freeport LNG export plant in Texas, which was expected to restart operation in the second half of the January, but still pending regulatory approvals. U.S. gas stockpiles are about 1% above the five-year (2018-2022) average for this time of year. Natural gas prices have witnessed sharp correction from recent highs on decline demand but are expected to take support near 250-230 range and move higher towards 350-400 in medium term.

Factors affecting Natural gas prices

Production to remain tight in coming months

It is expected that the market remains tight from December to March amid weather-related issues, as the extreme weather conditions will hamper production. After the cold weather, it is expected that production will steadily increase. In 2022, production was driven by increased drilling activity in the Haynesville region in Louisiana and East Texas and in the Permian region in West Texas and Southeast New Mexico. Recent pipeline infrastructure expansions in both these regions facilitated the increases in production.

Consumption to remain variable on weather related demand

Residential and commercial natural gas consumption can be highly variable in winter months due to extreme weather events, when extreme cold weather across much of the United States led to increased residential and commercial natural gas consumption. Forecasts for colder weather in near term expected to support natural gas prices.

Increase in premium of Crude oil

Recent increases in crude futures to a seven-week high boosted oil’s premium over gas to its highest since March 2022. Over the last several years that premium has prompted U.S. energy firms to focus drilling activity on finding more oil instead of gas.

Natural gas inventory levels

The U.S. Energy Information Administration (EIA) most recently reported an inventory decrease of 82 Bcf for the week ended Jan. 13. That was far from the five-year average draw of 156 Bcf and the year-earlier pull of 203 Bcf.  The decrease for the Jan. 13 week lowered inventories to 2,820 Bcf but left stocks above the five-year average of 2,786 Bcf. It followed a rare January injection of 11 Bcf reported a week earlier.

U.S. production of dry natural gas

U.S. production of dry natural gas will average about 100.0 Bcf/d from December through March, down about 0.5 Bcf/d from November due to weather-related declines, usually caused by freeze-offs and the possibility of extreme winter weather events. Mild weather in key producing regions could prevent those declines. Dry natural gas production has increased during 2022 in the United States, averaging more than 100 Bcf/d in October and November and exceeding pre-pandemic monthly production records from 2019.

Daily Chart of Natural gas (NYMEX)

Analysis

In NYMEX Natural gas futures is expected to take support near $3 and 2.5 after falling sharply in past two months. On daily chart prices are hovering   below the 10, 20, 50 and 100 moving averages. Some short covering rally can be seen as the upside resistance lies near $4 and $4.8.

Daily Chart of Natural gas (MCX)

Analysis

In MCX sharp fall was seen in past few months in natural gas prices as they are hovering below 10,20,50 and 100 day moving averages .Prices have key support near 260-250 range last  seen in beginning of 2022. Prices can witness some short covering near current levels if it sustains above 320 further upside towards 360-400 can be seen in medium term. While downside support lies near 240-230 levels.

 

Disclosure

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