Natural gas prices down over 70% in 1 year. Decoding the bad news
Global natural gas prices shed more than 70 per cent in the last 12 months, influenced by a complex interplay of supply and demand dynamics shaped by geopolitical events, weather patterns, technological advancements, and global economic conditions.
In the key US NYMEX futures platform, prices have been struck at $2-3 mmbtu levels since the start of the year. Similarly, after hitting an all-time high of Rs 801 in domestic MCX futures, prices plummeted sharply, trading below Rs 250 levels throughout the period.
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 in the commodity.
Russia used its natural gas exports as an economic weapon against Western European countries last year, which forged worries over acute fuel shortage, sending prices to record highs. This has disturbed global trade flows that hampered consumers, businesses, and economies worldwide.
Meanwhile, situations have been entirely different in the past many months. Europe has replaced Russian gas, and the winter was unseasonably warm, which prevented shortages. Rising inventory levels in the US amid worries over a weak global growth outlook also affected the sentiment of the fuel.
LNG is a widely used energy in the industry sector, and hence, its price and industry demand are closely related. The recent economic jitters in China, the third largest consumer of this fuel, and global growth worries due to high-interest rates weighed down industrial activities and thus, the demand for energy commodities.
The power generation sector is a major consumer of natural gas.However, there are reports that power companies are less dependent on natural gas for electricity generation in recent times.
Natural gas deliveries by pipeline to US LNG export facilities have increased in the first six months of 2023. This was due to the reopening of the Freeport LNG terminal. Freeport LNG is the second-biggest LNG export plant in the US and has been closed since the middle of last year due to a fire outbreak.
As per the US EIA data, there is an increase in US gas exports. The agency believes that the trend will continue in 2023 and 2024 due to two new LNG projects that are expected to be operational soon.
Global demand for US LNG has increased after countries reduced Russian oil and gas purchases following sanctions after its war against Ukraine. A decrease in spot prices due to mild winter temperatures and above-average inventory levels in the northern hemisphere is expected to attract imports from more price-sensitive Southeast Asian countries.
The balance between natural gas supply and demand directly affects its market price. When demand exceeds supply, prices tend to rise due to scarcity. Conversely, oversupply leads to lower prices as producers seek to offload excess inventory.
Looking ahead, the interplay between demand and supply dynamics, weather patterns, economic growth, and geopolitical events continue to determine the commodity price. The present demand outlook for natural gas looks challenging, as the world continues to prioritize cleaner energy sources. As key suppliers like Russia are grappling with geopolitical uncertainties, further liquidation in prices is most likely to be limited.
(Hareesh V is Head of Commodities at Geojit Financial Services)