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Declining trend in natural gas prices will reverse shortly

MSN 2020-06-28 08:04:00

Sakina Mandsaurwala

Precious metal gained last week on renewed fears about rise in COVID-19 cases, gold prices increased by 1.8 percent and silver prices climbed by near a percent last week.

Base metals prices remained sideways on rising economic uncertainty and weaker industrial demand.

Copper and Aluminium closed with gains while other metals traded flat to negative last week. Copper prices rallied merely on concerns of tighter supply as the rise in COVID-19 cases among mine workers led to shutdown in production.

Energy complex traded negative with Crude oil prices down 1.6 percent and Natural gas prices down by more than 7.5 percent. Crude oil prices turned lower this week on expectation of United States oil supply and rise in crude oil stockpiles towards record high.

Natural gas prices have started the year 2020 relatively low and so far this summer, the prices has continued to trend lower because of high natural gas storage levels and declines in natural gas consumption in the industrial sector and lower exports of LNG.

The above average inventories have added to the supply, with stocks being 21 percent higher than the five-year average and 50 percent higher than last year's levels. As per EIA's short-term energy outlook, natural gas storage will reach near record 4.1 trillion cubic feet by the end of October 2020.

The decline in LNG exports also contributed to the downward pressure on natural gas prices. Natural gas deliveries to LNG terminals have averaged 4.0 Bcf per day in June.

But lower prices are now triggering decline in production and at the same time due to competitive cost advantage over other fuels like coal, gas consumption by power plants have started showing rising tendencies. EIA STEO also forecasted that the dry production to continue to decline steadily, reaching a low of 84.2 Bcf per day in May 2021.

So, while at present, lower consumption and weak exports with higher inventories are depressing the natural gas prices. We expect to see a strong bottom shortly on account of continued decline in production and pick up in exports in the third quarter of 2020. We expect prices to firm up to $2.0 per MMBtu from the current prices of $1.5 per MMBtu. We expect MCX Natural gas to get strong support around Rs 100-105 levels in the coming days. Currently, MCX Natural gas prices are trading at Rs 117 per MMBtu.

(The author is Commodity Analyst at Narnolia Financial Advisors.)

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