Natural gas price recovers

Increase in demand from the electric power sector will drive consumption this year



Natural gas, which began 2016 on a weak note, found some respite in the past month. The US Henry hub spot price tumbled 33 per cent in the first two months to a low of $1.55 per mmBtu in February.

The natural gas futures contract traded on the New York Mercantile Exchange (NYMEX) fell 27 per cent during the same period. A warmer winter, supply glut and record inventories had kept gas prices under pressure.

According to data from the US Energy Information Administration (EIA), natural gas inventory surged to a record high of 4,009 billion cubic feet (Bcf) in November last year. The recent warm winter has resulted in a slower draw-down from inventories.

However, the price has reversed sharply higher since last month. The NYMEX futures contract has rallied 18 per cent to $1.90 per mmBtu from its March low of $1.61 per mmBtu. The forecast of an uptick in consumption in 2016 could lend support and limit the downside for the gas price. The US EIA estimates gas consumption to average 76.2 Bcf per day this year, a 1.2 per cent increase from the average consumption of 75.3 Bcf per day in 2015.

Good news

An increase in demand from the electric power sector will be the major driver for consumption this year, according to the EIA.

Though this is good news for gas prices, the upside could be limited due to expectations of higher inventory levels. The EIA estimates the inventory to touch a record high of 4,112 Bcf in October this year.

On the domestic front, the natural gas futures contract traded on the Multi Commodity Exchange (MCX) fell 24 per cent in the first two months of this year. The contract touched a low of ₹109 per mmBtu in March and has rallied 17 per cent from this low.

The domestic futures contract moves in tandem with the NYMEX contract. On the charts, there is no sign of a possible sharp fall in the near term.

The uptrend that has been in place since March may remain intact and the gas price may continue to move higher, going ahead.

The NYMEX natural gas futures contract is range-bound around the psychological $2 resistance level since late March. The contract is stuck between $1.89 and $2.07 and a breakout on either side of this range will decide the next leg of move. A strong break above $2.07 will strengthen the bullish momentum and take it higher to $2.18. A further break above $2.18 will pave the way for a rally to $2.30 and $2.32 in the medium term.

The 21-day moving average is a significant intermediate support for the contract within the current range. A strong break below this can take the contract below $1.89, which is the 38.2 per cent Fibonacci retracement support. A strong break below $1.89 can drag the contract lower to $1.80 or even $1.76.

The level of $1.76 is an important medium-term support. As long as this holds, a range-bound move between $1.76 and $2 is possible over the medium term. But a break below $1.76 will increase the threat of revisiting $1.62 levels.

On the domestic front, the MCX-natural gas futures contract is facing resistance at the 21-week moving average around ₹137. A strong break above this hurdle can take the contract higher to ₹148. A further break above ₹148 will see the rally extending to ₹160 in the medium term. On the other hand, inability to rise past the 21-week moving average resistance could drag the contract lower to ₹125 and ₹120.

The key support to watch is ₹118. The medium-term outlook will turn negative only on a strong break of this support. The next target will be ₹110.

Bullish outlook

The MCX contract has been range-bound between ₹126 and ₹137 since the last week of March. A breakout on either side of this range will decide the next leg of move. The 21-day moving average is on the verge of crossing the 55-day moving average.

This is a bullish signal and implies the possibility of a break above ₹137 in the short term. A break above ₹137 can take it to ₹145. On the other hand, the outlook will turn negative if the contract falls below ₹125. This can drag the MCX natural gas futures contract lower to ₹120 and ₹117.

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