Commodity Call. Warm winter worries hit natural gas

It was an unforgettable week for natural gas traders, who have been seeing prices under pressure for many months. US Henry Hub spot prices for natural gas hit a 16-year low of $1.62 per mmbtu on Tuesday. New York Mercantile Exchange (NYMEX) futures took their cue from the spot prices and declined below the psychological $2 mark for the first time since 2012. The futures price too hit a 16-year low of $1.734 per mmbtu on Tuesday last week. The contract has closed the week at $1.767, down 11.2 per cent for the week.

The natural gas futures contract traded on the Multi Commodity Exchange (MCX) moves in tandem with the NYMEX contract. The MCX contract fell to a low of ₹114.2 per mmbtu on Friday and closed 12.6 per cent lower for the week at ₹117.4.

The recent fall in natural gas prices has been attributed to the forecast of warmer weather in the US in the month of December. Expectations of lower demand for heating, as a result, have dragged gas prices lower. Gas prices were range-bound until August this year. But a sharp decline started thereafter as supply worries and a huge build-up in inventories put prices under pressure. Data from the US Energy Information Administration (EIA) show that inventories rose to a record high of 4,009 billion cubic feet (Bcf) in November. On the other hand, marketed production also surged to hit a record high of 81.1 Bcf a day in September. The EIA expects production to average at 79.6 Bcf a day this year, up 6.3 per cent from last year.

The recent warm weather has fanned oversupply concerns and increased the downside pressure on prices. The chart suggests that there is room for gas prices to extend their fall. Any change in the weather forecast in the coming weeks could cause a bounce-back in prices, but that could be short-lived.

The decisive fall below $2 in the NYMEX futures contract is a negative signal. The contract has closed below $2 on a weekly basis for the first time since 1999. So, the downside pressure will ease only if the contract bounces above this level. The outlook is bearish. A fall to test the immediate support at $1.6 is possible in the coming weeks. A reversal from this support will increase the possibility of seeing a rally to $2. But a strong fall below $1.6 will increase the danger of the contract plummeting to $1.185. The key resistance to watch on the upside is $2.3; it will have to be surpassed decisively in order to turn the outlook positive.

On the domestic front, the MCX natural gas contract has fallen sharply below an important support at ₹150 in the last couple of weeks. Strong resistance is now poised at the ₹130-140 zone. As long as it trades below this resistance zone, a fall to test the 2012 low of ₹99.5 looks likely in the short term. Whether the contract reverses higher or declines will decide the next leg of the move.

An upmove from ₹99.5 can take the contract higher to ₹130 and ₹140. A further break above ₹140 will see the rally extending to even ₹160 levels over the medium term. On the other hand, a decisive break below ₹99.5 will increase the danger of the contract declining to ₹80 or even ₹70 levels thereafter.

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