Natural gas blows hot in cold US winter

Commodity Call

Natural gas prices have rallied sharply following an unusually freezing winter in the US..

Temperatures dropping to record lows in many parts of the US has increased the demand for natural gas, a primary heating source.The data available from the US Energy Information Administration shows that there has been a sharp drop in natural gas inventory in the last few months.

Since November last year, gas inventory has dropped 42.8 per cent to 2,193 billion cubic ft (Bcf). This is much higher than the 28.7 per cent drop in inventory for the same period last year.

In the international market, natural gas prices are at $4.94 per million British thermal units (MMBtu), up 46 per cent since November. The natural gas futures contract in MCX too has seen a sharp rally. It has moved up from a low of ₹210.5 per MMBtu in November last year to ₹302.6 now.

Reports say temperatures could remain low in the US until March. So, demand for natural gas could continue to remain high. This would take gas inventories still lower, thereby pushing the price further higher in the coming months.

Growing demand

The demand for natural gas as an alternative for coal in electricity generation has been a major driver behind new gas exploration projects globally.

In 2015, global natural gas demand would be around 3,258 million tonnes (mt) of oil equivalent, says British Petroleum, up from the 2,987 mt recorded in 2012.

Supply is pegged to be neck-to-neck with demand at 3,291 mt (which is up 8.5 per cent from the supply in 2012). In India too, demand for natural gas is expected to be robust.

The Indian Petroleum and Natural Gas Regulatory Board expects gas demand to increase at a compounded annual rate of 6.8 per cent till 2029-30.

The two major consumers of natural gas in India are the power and fertiliser sectors. The domestic consumption is largely met through imports.

As such, fluctuation in the rupee will influence the prices of natural gas in our country to a large extent.

OUTLOOK

Long-term view: The strong downtrend in the MCX Natural gas futures contract from the 2008 high of ₹591.8 halted in 2012. The natural gas contract bottomed at ₹99.5 in April 2012 and has been in a strong uptrend since then. Long-term support for the contract is at ₹210.

On the other hand key resistance is at ₹410. A strong break above this resistance will open doors for a rally to ₹600 in the long-term.

But a failure to breach ₹410 will turn the outlook bearish and can drag the contract lower to ₹290 or even ₹250 in the long-term.

Medium-term view: Medium-term outlook is mixed for the contract. Strong support is at ₹240. Intermediate resistance is at ₹346 — the 50 per cent Fibonacci retracement level.

A breach of this resistance can take the contract to ₹400 in the medium-term. Failure to break the resistance at ₹346 can keep the contract in a sideways range of ₹280 and ₹346 for some time and then it can rally to ₹400. The bullish trend will reverse only on a decline below ₹240. The contract will then drop to ₹210.

Short-term view: For the short-term there is a strong resistance at ₹346 which can halt the current upmove for a while.

There is a high probability for a pullback at this level as traders do some profit booking. A reversal from ₹346 can take the contract lower to ₹280, which is the significant support level.

Fresh buying interest can emerge in the market in this ₹280 support level.

The downside is expected to be limited to ₹280 in the short term. A break below ₹280 will turn the outlook negative and will take the contract lower to ₹240 in the short term.

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