While natural gas has risen back above the pivotal $2/mmBtu mark and shows potential for further gains, the major hindrances are higher stocks in US storage and continued virus spread in US.
Ravindra Rao
After days of rangebound movement, natural gas prices on NYMEX have breached past the $2 per mmBtu level and tested the highest level since January 2020.
Natural gas had slumped to 1995 lows in the month of June but recovered and traded in a broad range of $1.6-1.95/mmBtu in last few weeks before giving a break out earlier this month.
Natural gas speculators amassed huge short positions in the last few months as domestic and global glut amid virus outbreak weighed on prices. However, speculators have begun to reduce their bearish bets amid expectations that continued economic recovery may lead to a pick up in demand.
US gas exports fell sharply in the last few months owing to slower economic activity globally and robust supply. However, demand outlook improved as manufacturing activity picked up pace in major countries.
The JP Morgan Global Manufacturing purchasing managers index (PMI) rose to a six-month high of 50.3 in July, up from 47.9 in June. The index is back above the neutral 50 mark for the first time since January. A reading above 50 separates expansion from contraction.
According to Refinitiv, the amount of gas flowing to US LNG plants averaged 4.0 billion cubic feet per day Bcf/d so far in August, putting LNG exports on track for their first monthly gain since hitting a record high of 8.7 Bcf/d in February. That compares with a 21-month low of 3.3 Bcf/d in July when buyers cancelled the most cargoes in a month.
Natural gas has also benefitted from hot weather in the US which has increased demand for air conditioning. The month of July has been warmer than average while hot weather is seen continuing in August as well. As per Weather Company outlook, summer may end on a hot note in the Northeast and parts of the Four Corners region.
Increased storm activity has also lead to some risk premium over natural gas, however, we have seen no major impact on gas production or energy infrastructure. In the first two months of the Atlantic Hurricane Season, we have seen nine storms forming in the Atlantic region. Currently, focus is on Hurricane Isaias which made landfall near North Carolina.
While natural gas has risen back above the pivotal $2/mmBtu mark and shows potential for further gains, the major hindrances are higher stocks in US storage and continued virus spread in the US. US working gas stocks are 15 percent higher than the 5-year average for this time of the year despite smaller than average buildup in the last few weeks. Coronavirus cases in the US have continued to rise, forcing states to re-impose restrictive measures.
The author is VP - Head Commodity Research at Kotak Securities.
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