Natural Gas prices have soared by over 25 per cent on a year-to-date basis till August 30, 2016 on account of rise lower inventory and hot summer in US. Also there are concerns about the storm that is developing in Atlantic which could impact Gulf of Mexico’s natural gas production. For US, it has been hottest summer on record. Nearly 50 per cent of US households use natural gas both for heating and cooling. Hot summer weather drives the demand for natural gas-fired electricity generation to power air conditioning and in cool weather, natural gas is used to power heater in the house. Prices of the commodity have risen 15 per cent in the past 10 trading sessions.
Natural gas prices have bounced from lows of March 2016. One of the main factors for low natural gas prices during Jan-Mar was mild weather in US. According to EIA (US Energy Information Administration), at the end of March 2016, US natural gas inventories were at 2.5 trillion cubic feet—67 per cent higher than the levels in 2015 and 53 per cent higher than their five-year average. If we look at the last ten years, whenever natural gas inventories have been higher than their five-year average; prices have been fallen and vice-versa. That is why in March 2016, natural gas was trading at Rs 117 while now it is trading at Rs 198.4 as of now natural gas inventories have decreased considerably from March’s high. For short term, weather plays an important role in driving natural gas prices higher or lower.
Now US natural gas inventories are 11.7 per cent more than five-year average and it has come down from the highs of 53 per cent and that is why we are witnessing rise in prices. The EIA (U.S. Energy Information Administration) reported that US natural gas prices will average $2.41 per MMBtu (million British thermal units) in 2016 and $2.95 per MMBtu in 2017. While World Bank forecasts that US natural gas prices will average $2.30 per MMBtu in 2016, $3.00 per MMBtu in 2017, and $3.50 per MMBtu in 2018. So in the long run, the prices of natural gas are expected to increase. If the US will have severe winter, then we may expect prices of natural gas to shoot till Rs 260-Rs 270.
In MCX, natural gas has moved quite significantly in this month and momentum is still strong. It looks like it will retest the resistance level of Rs 200 which it has made in July month. Investors are not advised to short right now as every dip has been bought into. To initiate short position, natural gas should be below Rs 190. Natural gas is expected to face resistance at Rs 200-Rs 203 so investors are advised to book profit near that level and initiate short position with stop loss of Rs 208 and target Rs 185.
(The author is director at Tradebulls)