Natural Gas: Short-term sentiments remain weaker due to feeble demand

Natural gas prices have dropped more than 75% in the last six-month period. Moderate after-winter demand and concerns about industrial consumption because of the US Federal Reserve’s aggressive rate hikes adversely hit the demand outlook.

The year 2022 was the most volatile period ever for gas prices. Global supply chain uncertainties due to the Russia-Ukraine war and export hindrances from the top producer, the US, resulted in unusual price fluctuations.

However, in the benchmark NYMEX platform, trading started this year at $4.40 MMBtu and inched down to $2 in February. The commodity is now trading at $2.50 MMBtu. A similar trend was witnessed in the domestic markets as well. The most active MCX futures corrected to Rs 212 MMBtu from their all-time high of Rs 801 hit in August last year.

Natural gas is a widely used energy source in the industry sector hence its price and industry demand are closely related. The commodity is a large source of energy in industries with applications ranging from heating and cooling to power machinery and equipment. The recent uncertainties in the global economy due to the aggressive rate hikes by the US Federal Reserve weighed down industrial activities and thus the demand for fuel.

Winter demand for gas has already ended in the top-consuming countries and the summer has not started yet. Demand for gas for residential purposes during the period between winter and summer is usually low. Furthermore, power companies reduced reliance on natural gas thanks to a drop in electricity consumption by households.

The European benchmark, Dutch TFT which soared last year after Russia’s invasion of Ukraine, has now declined to a one-year low. This was because the European Union has so far successfully weathered the energy crisis by rounding up alternatives to Russian gas, widespread conservation efforts and a relatively mild winter. The prices of this benchmark had quadrupled last August due to Russia’s invasion of Ukraine and the subsequent reduction in Russian gas to Europe.

Russia was the key gas exporter to many European and other countries but it slashed supplies to those countries in response to the sanctions placed on the country for invading Ukraine. The curtailment of Russian gas flows and difficulty in sourcing gas from other countries forged worries of acute fuel shortages in the second half of 2022. This has disturbed global trade flows that hampered consumers, businesses, and economies worldwide. Reports of a restart of Freeport LNG, the second-largest gas export facility in the US also added worries about a supply glut. This facility has been shut since June 2022 after a fire and can pull in about 2.1 billion cubic feet per day of pipeline gas. However, the country foresees exports of LNG will continue to drive growth over the next two years.

At the same time, the country has reported a record level of gas consumption in the previous year. This was driven by high winter demand from residential sectors and increased commercial usage during summer. A below-average temperature in winter spiked gas-fired plants to generate electricity for heating purposes and an extremely warm summer has led to higher demand for air conditioning in the country.

Going ahead, the demand might witness a bumpy road due to an ongoing shortfall in industrial and household demand. Easing supply chain uncertainties and increased production from the US may also weigh on the prices. Meanwhile, the long-term demand outlook remains clouded. Industrial demand from emerging countries, Russian supply, US production and inventory levels, and weather-related demand cast uncertainty on the price of this fossil fuel.

(The author is Head of Commodities at Geojit Financial Services.)

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