Natural gas fires up

Further rise in price looks likely after a short-term sideways consolidation

Natural gas prices are on fire. After falling to an 18-year low in March this year on supply glut fears, prices have recovered sharply in the last few months. The natural gas futures contract traded on the New York Mercantile Exchange (NYMEX) touched a low of $1.611 per mmBtu in March and is now at $2.77, up 72 per cent.

On the domestic front, the natural gas futures contract traded on the Multi Commodity Exchange (MCX) has moved up from ₹109 per mmBtu in March to ₹186 now.

The triggers

Three major factors have contributed to this sharp reversal in natural gas prices. First is the drop in US rig count. According to the Baker Hughes Drilling Rig Count report, from over 200 in August 2015, the count of drilling rigs in the US now stands below 100. Second, there has been higher demand from power plants in the US this year due to relatively warm weather.

Further, the US gas inventory has also been dropping. From around 4,000 billion cubic feet in November 2015, gas inventories in the US dropped to around 2,500 Bcf in April 2016 and as of July stood at 3,288 Bcf.

A report from the US Energy Information Administration shows that natural gas demand in 2016 is expected to increase 1.6 per cent to 76.5 Bcf per day.

On the other hand, the supply is projected to go up at a slightly slower rate of about 1 per cent to 79.53 Bcf per day, thereby bringing down the deficit to 3.03 Bcf per day in 2016, from 3.47 Bcf per day a year ago. The EIA also expects the price rise to continue.

On the charts

The NYMEX-Natural gas contract is facing strong resistance near the psychological $3 level. It made a high of $2.99 on July 1 and had fallen to a low of $2.62. Strong support for the contract is between $2.60 and $2.55. An immediate break below $2.55 looks less probable. Dips to this support zone may find fresh buying interest in the market. A range-bound move between $2.60-$3 or $2.55-$3 can be seen for some time before an eventual break above $3. Such a break can take the contract higher to $3.30 and $3.34 initially. If the contract manages to break above $3.34, the rally can then extend to $3.48. On the other hand, if the contract declines below $2.55, a fall to $2.50 or $2.48 is possible.

On the domestic front, the MCX natural gas contract has resistance between ₹200 and ₹205, the latter being the 200-week moving average. Over the last six weeks, the contract has been range-bound between ₹179 and ₹200. This sideways consolidation move can continue in the short term for a few more weeks. However, the bias will remain positive within this range to see a strong break above the ₹200-205 resistance zone.

A strong break above ₹205 will see a fresh rally to ₹221 — the 38.2 per cent Fibonacci retracement resistance. Further break above ₹221 will see the upmove extending to ₹250 and ₹255 levels thereafter.

The 100-week moving average at ₹175 will be an important support and there is no threat of a fresh fall as long as the contract trades above this level. But a fall below ₹175, if it happens, can drag the contract lower to ₹165 or ₹160 thereafter.

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