Natural Gas: Weekly Blog

Shrinking Natural Gas Storage Surplus Sets Stage for Higher Prices

US natural gas futures have been on an uptrend for the past month due to optimism over summer season demand and lower US output. Last week prices rose further as a plant outage in Norway and halted flows to a UK terminal raised market expectations of European demand for US liquefied natural gas. Adding to the gains was the shrinking US inventory surplus amid a surge in summer demand. MCX natural gas prices rose nearly 14%, from Rs 215 per mmbtu to settle near Rs 247 last week.

Catalyst Driving Natural Gas prices

Shrinking storage surplus: Though the injection of US natural gas into storage of 98 billion cubic feet (bcf) in the week ended May 31 was more than the consensus view, the inventory surplus continues to shrink. As seen in the adjacent chart, inventories, which stood 41% above the 5-year average in March, have consistently declined and are now 25% above the 5-year average.

Higher cooling-degree days: The weather in the US is turning warmer, with cooling-degree days, a proxy for demand, through June 8 is roughly 54% more than the long-term norm. The warmth across the majority of the US in the next 8-14 days is trending above normal, likely boosting gas use, while production could remain subdued.

US output declining: The average daily US output of natural gas in May, at about 100 bcf, is well below the 102.3 bcf seen in winter, implying tighter balances.

Outlook: Upward bias in Natural gas to continue till end of June (MX CMP: Rs 247 per mmbtu)

Natural Gas is a weather-driven commodity and follows a seasonal demand pattern. The commodity is currently in its peak summer demand period (June-August) wherein we generally see an upsurge in demand from the power sector. The recent prediction of higher cooling degrees days ahead could lead to strong demand for Natural gas. On the other hand, the threat of supply disruptions persists due to uncertain outages, the one seen last week in Norway. Thus, supplies could tighten going forward. Strong support for MCX Natural gas is seen at Rs 238/230 per mmbtu, while on the upside, prices may rise towards Rs 271/279 per mmbtu in the short term.


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