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‘Demand due to extreme weather models and lower than usual inventories takes natural gas prices to multi-year hihs’

Natural gas prices are hovering at two-and-half-year high. The benchmark US NYMEX futures gained more than 65 percent since the start of 2021, while it has doubled since the pandemic induced selloffs last year. Extreme weather models, rising liquefied natural gas exports, and lower than usual inventory levels influenced the market dynamics.

Similar traction was witnessed in domestic futures too, with the most active MCX prices rallied to Rs 283 per million British thermal unit (mmbtu), its highest level since December 2018. Tracking its overseas sentiment, this year alone, domestic gas prices gained more than 53 percent.

Higher demand for generating electricity due to hotter than usual weather in many parts of the US amid flat production buoyed the sentiments. A heatwave gripped in the Pacific Northwest and a drought in Brazil, which curtailed power output from hydroelectric dams also raised the demand outlook. Demand outside the power sector was also reported higher in the past few months.

The United States is the world’s largest producer and consumer of natural gas. As per the US Energy Information Agency statistics, US dry natural gas production in 2020 was about 33.4 trillion cubic feet. The country also consumed 832 billion cubic meters of gas during this period. About 38 percent of the US consumption accounted for generating electricity and 33 percent for other industrial purposes. Residential and commercial usages come next on the list.

The country is one of the leading exporters of the commodity as well. Exports were minimal until 2000, since then they increased every year due to the high production and competitiveness of US natural gas in international markets. Expansion of infrastructures like pipeline networks and low rates also aided the trend.

However, US production was relatively flat in recent months due to lower output of associated gas from shale oil rigs.

The US has recorded the second-highest daily production last year, but a rampant demand in China sucking the chilled cargoes of gas from the country. Increased consumption from both industrial and residential users incentivised more Chinese imports. The country’s aim, to meet its long-term environmental projections also elevated the demand or the low emission fossil fuel. As per the forecast, China’s gas demand may hit a new high this year as the country’s economy recovers from the pandemic faster than most other countries.

Weather models and anticipated heat waves continue to be a key factor in determining the future price of the fuel. Record natural gas exports and demand from areas other than power generation amid flat production may keep prices firm.

However, the strength in prices may be short-lived and downward pressure is on cards in near future. There are reports that natural gas consumption in US electricity generation is set to decline this year. Instead of natural gas, coal-fired power generation will take a lead due to its cost advantage. The US EIA also projected a rise in output and a slowdown in export growth by next year gradually weigh down the sentiments.

On the price front, a direct rise above $3.80 would lift NYMEX futures prices further higher, possibly towards $4.5 or more. However, due to the inability to move past the same expect corrective selling pressure, which may lead prices to the stiff support of $2.4 later. In MCX, a choppy trade inside Rs 285-262 level was expected initially but breaking any of the sides would suggest a fresh short-term direction to the commodity.
Source: Moneycontrol

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