Analyst corner | Demand fundamentals for natural gas favourable

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New Delhi | Published: June 25, 2019 1:57:02 AM

Global gas demand is expected to gr-ow at a rate of 1.6% a year until 2024.

natural gas, lngNatural gas storage is used to balance seasonal fluctuations in production and consumption.

Natural gas has experienced a tough year for both investors and producers as prices slumped over 25% YTD, and prices of liquefied natural gas, otherwise known as LNG, just hit a three-year low as supplies have risen faster than demand. The warm-er-than-normal weather that beleaguered China during the winter, reduced Asian natural gas demand and weighed on US exports of LNG. Prices fell as a result of warmer-than-normal temperatures across much of the US, which reduced the use of natural gas for space heating and contributed to above average inventory injections during the quarter.

Natural gas storage is used to balance seasonal fluctuations in production and consumption. Currently, we have seen huge bearish injection, in which this week we saw injection levels which were higher than the five-year average, intensified a sell-off that left the natural gas with its lowest close in three years. The injection season is in full swing. Electric power sect-or is the primary consumer of natural gas. Its share in the annual demand structure is over 31% while its share in the injection season demand is close to 50%.Unlike heating-driven demand from residential and commercial users, electricity-driven demand from the EP sector is much more sensitive to price changes. It is precisely this high price elasticity of demand that makes trading during the injection seas-on more price-dependent and less weather-dependent. Combined net injections into storage during April and May 2019 are esti-mated to be the largest on record for that 2-month period at 831 Bcf, which helped to cut futures prices though inventories remain lower than the 5-year average.

Global gas demand is expected to gr-ow at a rate of 1.6% a year until 2024, fuel-led by Chinese consumption which will ac-count for over a third of the demand growth during the period as China is push-ing to switch from coal to gas for residen-tial use to improved air quality in China. Domestic demand in US, the Middle East and North Africa would contribute to the growth in demand. The industrial sector is expected to be a strong source of growth, accounting for almost half of the global increase, replacing power generation as the main growth driver. Demand fundame-ntals for natural gas remain favourable con-sidering the demand for cleaner fuels and the commodity’s relatively lower price has stirred natural gas share of domestic elect-ricity generation to 35%, from 25% in 2011.

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