Commodity Talk: Negative sentiments likely to drag natural gas prices further, says Amit Sajeja of Motilal Oswal

Where do you see prices of natural gas heading globally and in India?

NYMEX Natural Gas price can briefly fall below $2/MMBtu while MCX price can test levels around Rs 145 – Rs 130 zone as negative sentiments are likely to continue to drag the prices lower over the medium-term. Although there would be intermittent bouts of short-covering, it is too early to say that prices have bottomed out as fundamentals still remain weak.

Natural gas is trading at a month low and has fallen over 20% MoM? What all are leading to the fall?

Unseasonably mild weather since the start of the heating season together with relatively high inventory levels have kept pressure on the natural gas prices in the US. Meanwhile, prices are also expected to stay under pressure globally as warm weather forecast in US and Europe along with increasing US gas production continue to push prices lower.

Demand in Asia is subdued both on the commercial as well as industrial side. US gas consumption in the residential and commercial sectors, which was 18% lower in January and 12% lower in February as compared to the same months in 2022, drove the decrease in overall natural gas consumption.

Prices are expected to trade lower till inventory data shows some improvement along with sustained uptick in industrial demand. Power burns in summer are likely to fail to support prices even if it picks up as the market remains in surplus.
What is the global demand and supply situation like?
Global gas demand is expected to largely remain flat in 2023. In the US, Natural gas consumption will average about 99.1 billion cubic feet per day (bcfd) in Q1, down 5% from the same quarter last year on the back of very mild temperatures that have reduced demand for space heating.

On the supply front, Freeport LNG can turn about 2.1 bcfd of gas into LNG for export when operating at full capacity. US dry gas production is expected to rise to 100.27 bcfd in 2023 and 101.68 bcfd in 2024 from a record 98.09 bcfd in 2022. Working natural gas stocks in storage is around 24% more than the five-year average, and 36% more than last year at this time.

The US Federal Reserve has hinted of a likely rate pause going ahead. What will be the impact, should this happen?
Governor Powell in his last policy meeting has already hinted that the Fed could go slow on raising rates from here on. Slowing inflation is adding to the overall commentary that the Fed could be nearing its peak in the rate hike cycle.

Weakness in the dollar in the last couple of months suggest that the Fed after raising rates in the next meeting could take a pause. This could add to further weakness in the dollar and generally provide support to commodities.

Government has indicated a price cap on the price of all natural gas produced locally? Sentiment wise, what will be the impact on the sector? According to your assessment, what could be that price?
Won’t be able to answer as it is a sector specific question which is out of our purview.

Has the impact of Russia-Ukraine war’s on energy prices played itself out completely?
Geo-political risk premium due to the Russia–Ukraine conflict looks to be very negligible now as natural gas prices are back to their levels before the war. Yes, the threat of things escalating and the rhetoric of nuclear war does create uncertainty but currently this factor looks done and dusted for the natural gas market.

What will be your advice to investors in this commodity?
As discussed earlier, even though brief relief rallies are possible, the medium term trend would remain negative for NYMEX natural gas below $3 mark (corresponding to Rs 230-240 range on MCX).

Investors wanting to create fresh positions are advised to wait for such short-covering rallies to go short. Test of $1.80-$1.60 range (Rs.145-130 on MCX) looks possible over the next quarter.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)