Natural gas turnaround hinges on US weather

Ravindra Rao

NYMEX natural gas price rose over 3 percent last week marking its first weekly gain in three weeks as lower price attracted buyers. Price lately hit a low of $ 2.083/mmBtu, the lowest level since August 2019

Price benefited from forecasts of cold weather in the US, a decline in US natural gas rig count and higher demand from the power sector. However, the momentum has weakened and the price is struggling to sustain above $ 2.2/mmBtu .

Natural gas price is almost 39 percent less than the same period last year and the lowest since 2016 for this time of the year. Natural gas speculators lately raised net short position to the highest level since September 2015 (as per CFTC reports). This shows entrenched bearishness in the market, however, this may also result in bouts of short-covering if positive factors emerge.

US market remains well supplied with production near record-high levels and subdued demand. This picture is unlikely to change drastically, however, if we see some winter-related demand picking up or some slowdown in production growth, it may be enough to force speculators to exit their bearish bets.

US weather forecasts are pointing to the possibility of cold weather in US in mid-January, however, its impact on price will be dependent on the intensity and longevity of the cold blast.

According to weather forecaster, a pair of weak storms is likely to first spread snow over the northern tier, replacing the mild air that has been gripping the region with colder air from Canada and laying the ground for a more significant storm with snow and ice in the Northeast this weekend.

On the supply front, US gas production remains high however drop in rig count shows weakening production interest. The number of rigs drilling for natural gas has fallen to 119 rigs, lowest since November 2016.

Amid other factors, narrowing spread between coal and natural gas price will incentivize power generators to use more gas as fuel for power generation. As per US EIA data, coal price in the Central Appalachia region is trading near $ 2.3/mmBtu, a slight premium than natural gas which is trading near $ 2.2/mmBtu levels.

Overall, market sentiment is too negative for natural gas and while we may not see a major shift soon, the extreme positioning on short side could make natural gas vulnerable to a short-covering move if positive factors emerge. The major trigger in the near term could be a sustained cold snap in the US.

(The author is VP- Head Commodity Research at Kotak Securities.)

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