Energy prices traded on a diverse path last week; crude oil prices fell 6 percent, while natural gas prices rose by 9 percent on MCX. The massive price moves increased volatility and boosted volumes in natural gas contracts to an all-time high. Though these two energy alternatives have a positive long-term correlation, there have been periods in the past where the correlation between crude prices and natural gas prices has turned negative, like what we are witnessing right now.
Natural gas prices surged last week on forecast of colder-than-normal temperature boosting demand for heating. The higher demand would mean more withdrawals from existing inventory, which is already 16 percent below its five-year average and its lowest since 2005.
At present, natural gas inventory stands at 3.247 trillion cubic feet. The number is low and is concerning the market as there could be a possible shortage of gas in some parts of US. Despite the record US gas production, increased demand for natural gas lowered the injections into the storage, creating a deficit.
During the winter season, the demand is measured by the number of heating degree days (HDD) required to heat homes and industries. Currently, HDD in the lower 48 states is at 473, as against the long period average of 409, indicating higher demand for natural gas.
Gas production has hit a record high in US but the rapid rise in exports has consumed a large part of the additional gas production. US gas exports rose almost 80 percent in the last 5 years and are expected to further rise in the foreseeable future.
Going forward, at least in the short term, we remain positive on natural gas and prices are likely to strengthen on forecast of colder-than-normal temperatures, tight inventory levels, and higher exports. We believe MCX Natural Gas prices will remain supported at Rs 250-260 levels and trade higher towards Rs 330-350 level from the current price of Rs 290 per MMBTU. But any change in weather forecast will lead to higher volatility in prices in the near term.
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