Although the move from the lower end to the higher end is a significant move of 40 per cent, prices were very volatile throughout.
YTD, NYMEX and MCX Natural Gas prices have gained by 20 and 22 percent respectively.
Production and inventory status
Since the nature of this commodity is seasonal and cyclical in nature, the inventory situation and the climate is what defines the sustainability of the price moves. Let us take a look at the inventory situation and the reason for the sudden price surge in this commodity, which is a trader’s paradise.
The total natural gas inventory as on July 30 2020 stood at 2.341 trillion cubic feet, which is well above last year’s level and 15.3 percent over the five-year average for late July. The number of rigs in operation in the US as on July 24 stood at 68, which is 101 below the last year level. This gives confidence to investors on possible decline in production in the coming months.
This possible decline in production was clearly evident in the Natural Gas Monthly report released by EIA on 31 July 2020 wherein for the first time in 36 months (since April 2017), the May month dry natural gas production decreased year to year for the month to 2,713 billion cubic feet (Bcf), or 87.5 Bcf/d, which was lower than the May 2019 level of 89.9 Bcf/d.
Despite this year-to-year decrease, the average daily rate of dry production was the second highest for the month of May.
On the consumption side, the year-over-year average daily rate of consumption of dry natural gas in May 2020 increased in two of the four consuming sectors. Residential deliveries: 238 Bcf for the month, or 7.7 Bcf/d, which was up 12.3% compared with 6.8 Bcf/d in May 2019. Residential deliveries were the second highest for the month since 2005.
Electric power deliveries: 832 Bcf for the May month, or 26.9 Bcf/d, which was up 0.1% compared with 26.8 Bcf/d in May 2019. Electric power deliveries were the second highest for the month since EIA began using the current definitions for consuming sectors in 2001.
The way forward
Natural gas plunged to a 25-year low in June as demand for natural gas fell on the milder temperatures and the world remained awash with the fuel. Natural gas is a traders paradise and volatility is going to be the key in the coming sessions as we move into winter in the US, which will start from October onwards, and will decide the sustainability of the rally for natural gas prices for the time being.
The bullish signal for natural gas comes on the cancellation of the Atlantic Coast gas pipeline and Hurricane ISAAIS was expected to bring cooler weather to most of the Gulf of Mexico. Natural gas prices have been trading under $2.50 since December 2019 on weak demand and oversupply. The recent rally is a signal for the investors across the globe that the price moves from hereon will be more faster and volatile than many anticipate.
However, the inventory situation is very comfortable and the rally in natural gas is more of a liquidity push chasing yields on asset classes other than precious metals. Besides, the price of NYMEX Natural gas as on 4 August stood at around $2.128/MMbtu while on the MCX the CMP stands at Rs 160/MMbtu and both these price zones are at their resistance levels. The possible implications of the cold weather situation arising in the Gulf of Mexico and more hotter temperatures for the rest of the United States will result in higher demand for natural gas and in turn the expected rally in the months ahead.
We see natural gas prices on the NYMEX heading towards $2.8/MMbtu from a two-month perspective while MCX Natural Gas futures has the potential to move higher towards Rs 215/MMbtu in the same time frame.
By Prathmesh Mallya
Prathamesh Mallya is AVP Research, Non Agri Commodities and Currencies, Angel Broking Ltd.