Natural gas price headed towards $3/MMBTU in a month

Natural gas is a commodity that has been heavily volatile in 2020. NYMEX natural gas prices made a low of $ 1.43/MMBTU in late June 2020, a high of $ 3.39/MMBTU in November 2020, and finally ended the year at $ 2.53/MMBTU, marking an annual gain of 16 per cent.

Since MCX’s natural gas prices are a mirror reflection of NYMEX rates, the volatility was similar on the domestic bourse. MCX natural gas prices were up 17 per cent in 2020, settling at Rs.182.1 per MMBTU on December 31.

Electricity generation via natural gas increased in the US in 2020.

The use of natural gas, which is one of the main sources of generating electricity in the US, has been substantial in the past five years. Annual electricity generation from natural gas power plants in the US increased 31 per cent in the northeastern region, 20 per cent in the central region, and 17 per cent in the southern region between 2015 and 2019. In the western region of the continental United States, electric power generation from natural gas power plants remained relatively flat during the same period. Through November 2020, the central, southern and northeastern regions have generated similar amounts of electricity from natural gas power plants.

While the electricity generation efforts via gas was commendable, the increase in LNG exports from the US also played a significant role for the rise in natural gas prices, while the world grappled with the pandemic in 2020.

In November, estimated LNG exports surpassed the previous record set in January 2020. In December 2020, the US Energy Information Administration (EIA) estimated that November US LNG exports reached 9.4 billion cubic feet per day (Bcf/d), which was 93 per cent of peak LNG export capacity utilization.

Several factors contributed to the increase in the US LNG exports in recent months. International natural gas and LNG prices increased in Asia and Europe with an increase in global natural gas demand after easing of COVID-19 restrictions and a fall in global supply due to unplanned outages at export facilities in Australia, Malaysia, Qatar, Norway, Nigeria, and Trinidad and Tobago. New US LNG export capacity of 2.7 Bcf/d was added in 2020, whereas several US LNG terminals, affected by hurricanes and annual maintenance, also resumed LNG shipments, according to the EIA.

On the other side, working gas in storage was 3,460 Bcf as of December 25, 2020, according to EIA estimates. Stocks were 251 Bcf higher than last year at this time, and 206 Bcf above the five-year average of 3,254 Bcf.

At 3,460 Bcf, total working gas is within the five-year historical range, which clearly indicates that the inventory is in a comfortable situation.

Hedge funds positioning in natural gas

Speculative positioning in natural gas increased in the second half of 2020, with hedge funds increasing their bets from net shorts to net longs.

As of April 14, 2020, hedge funds were net shorts in natural gas at 86,154 contracts. As of, December 29, 2020, they were net longs at 7,744 contracts, indicating a rise in interest in the commodity.

The tale of winter: Where is natural gas headed?

While the winter in the US is a time when the demand for gas increases, this time around, the winter (2020-21) is warmer than normal.

This US Winter Outlook 2020-2021 map shows above-average temperatures are likely in the south and below-average temperatures in parts of the north.

US temperature outlookET CONTRIBUTORS

Winter in the US (October-March) does not offer a feasible demand-side situation for natural gas prices to rise. Moreover, with a comfortable inventory situation and more coronavirus-related restrictions, a warm winter is not favourable for gas prices from here on.

We expect NYMEX natural gas prices to move higher towards $ 3/MMBTU in a month, while MCX gas prices have the possibility to move higher towards Rs 230/ MMBTU.

(Prathamesh Mallya is AVP Research Non-Agri Commodities and Currencies, Angel Broking)