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Below are Quote On Natural Gas – The speculators paradise By Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel Broking Ltd

Natural gas is a favourite commodity for traders and the rise in gas prices on the NYMEX as well as on the MCX futures in the time frame 6^thApril to 24^th June 2021 has been a stupendous 39 percent percent as shown in the chart alongside.

High temperatures in most part of US, lower injections in storage, increasing demand for gas, higher exports to Mexico, force majeure in the Permian Basin production region , drought conditions in the western US, lead to rising natural gas prices in the recent months,

April-October is the injection season for natural gas. Meaning, the gas goes in to storage for winter use. The key reason for rising natural gas prices in the past three months April-June is on account of rising demand across the United States, leading to lower injections in storage.

As per the inventory report released by the EIA on 24^th June, the average rate of injections into storage is 15% lower than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 8.0 Bcf/d for the remainder of the refill season, the total inventory would be 3,565 Bcf on October 31, which would be still 154 Bcf lower than the five-year average of 3,719 Bcf for that time of year.

Increasing Demand for Natural Gas

Natural Gas is used to generate electricity in the US. Increasing demand for gas in the Gulf Coast region on account of higher than normal temperatures led to higher electricity generation in the Electric Reliability Council of Texas (ERCOT) region in the recent weeks. Moreover, natural gas was the leading energy source amid declines in wind generation, since the region experienced severe winter temperatures in February.

Drought like conditions in the Western US also led to increased demand for natural gas to generate electricity. Natural gas demand for power generation in the Pacific Northwest increased 21% for the week ending 24th June, according to data from IHS Markit as extreme heat and drought conditionscontinue to limit hydroelectric generation in the region.

Increase in demand in the North East region in the US, and force majeure in the Permian Basin production region had its fair share of play in rise in natural gas prices in the recent weeks.

The U.S. economy continues to rise after reaching multiyear lows in the second quarter of 2020 (2Q20). The increase in economic activity and easing of the COVID-19 pandemic have contributed to rising energy use. U.S. gross domestic product (GDP) declined by 3.5% in 2020 from 2019 levels. This STEO assumes U.S. GDP will grow by 6.7% in 2021 and by 4.9% in 2022. The report from the EIA also stated that  forecast that inventories will end the 2021 injection season (end of October) at 3.6 Tcf, which would be 4% below the five-year average.  (Source- Energy Information Administration)

The storage data for the week ending 24th June is as follows

The net injections into storage totaled 55 Bcf for the week ending June 18, compared with the five-year (2016–2020) average net injections of 83 Bcf and last year's net injections of 115 Bcf during the same week. Working natural gas stocks totaled 2,482 Bcf, which is 154 Bcf lower than the five-year average and 513 Bcf lower than last year at this time.

Hedge Funds Dump Natural Gas

In the chart above, it is clearly seen that hedge funds continue to be sellers of Natural Gas contracts for most of 2021 as they are not optimistic for the commodity. As on 15^th June, hedge funds are net shorts in natural gas futures and options contracts at 1,05,784 contracts which when compared to 6^th April when they were net shorts at 53,010 contracts.

Where is the commodity headed?

The rate of injection in to storage is lower as discussed in the report, which means, the natural gas inventory before the start of the winter in the US in November is a key for the price of natural gas going forward.

Increasing exports to Mexico is another signal for increasing demand for the commodity combined with the increasing demand for electricity generation across the US.

However, hedge funds are not seeing this optimism for demand as they remain bearish on the commodity, taking in to consideration the increasing net shorts for the commodity for most of 2021 and the bearish positions further from here on will lead to a heavy bout of correction in natural gas prices.

Note of caution for those who are longs in the commodity. The technical set up in the commodity is like a double top formation on the MCX, which can lead to a heavy correction in the coming month. We expect Natural gas prices on the MCX (CMP: 254 as on 25^th June 2021) to head lower towards Rs.225 per MMBTu in a month time frame.

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