The year 2022 has been the most volatile period on record for gas prices. Global supply chain uncertainties due to the Russian-Ukrainian war and export impediments from the main producer, the United States, led to unusual price fluctuations.
However, on the benchmark NYMEX platform, trading started this year at 4.40 MMBtu and fell to $2 in February. The commodity is now trading at $2.50 MMBtu. A similar trend was also seen in domestic markets. The most active MCX futures have corrected to Rs 212 MMBtu from their all-time high of Rs 801 reached in August last year.
Natural gas is a widely used energy source in the industrial sector, so its price and industry demand are closely linked. The product is a great source of energy in industries with applications ranging from heating and cooling to machinery and electrical equipment. Recent uncertainties in the global economy due to aggressive rate hikes by the US Federal Reserve have weighed on industrial activities and therefore on fuel demand.
Winter gas demand has already ended in the most consuming countries and summer has not yet started. Gas demand for residential purposes during the period between winter and summer is generally low. In addition, electricity companies have reduced their dependence on natural gas thanks to a reduction in household electricity consumption.
Europe’s benchmark, the Dutch TFT, which climbed last year after Russia invaded Ukraine, has now fallen to its lowest level in a year. Indeed, the European Union has so far managed to overcome the energy crisis by mustering alternatives to Russian gas, widespread conservation efforts and a relatively mild winter. Prices for this benchmark had quadrupled last August due to the Russian invasion of Ukraine and the subsequent reduction of Russian gas to Europe.
Russia was the main exporter of gas to many European and other countries, but it cut supplies to those countries in response to sanctions imposed on the country for invading Ukraine. Reduced Russian gas flows and difficulty sourcing gas from other countries have raised fears of severe fuel shortages in the second half of 2022. This has disrupted global trade flows which have hampered consumers, businesses and economies around the world. Reports of a restart at Freeport LNG, the second-largest gas export facility in the United States, also added concerns about a supply glut. This facility has been closed since June 2022 after a fire and can suck about 2.1 billion cubic feet per day of pipeline. However, the country expects LNG exports to continue to drive growth over the next two years.
At the same time, the country recorded a record level of gas consumption the previous year. This is due to strong winter demand from residential sectors and increased commercial use during the summer. Below average temperature in winter has boosted gas-fired power plants to generate electricity for heating purposes and an extremely hot summer has led to increased demand for air conditioning in the country.
Going forward, demand may experience a bumpy road due to a continued shortfall in industrial and household demand. Easing supply chain uncertainties and increased production from the United States could also weigh on prices. Meanwhile, the long-term demand outlook remains clouded. Industrial demand from emerging countries, Russian supply, production and inventory levels in the United States, and weather-related demand are creating uncertainty about the price of this fossil fuel.
(The author is Head of Commodities at Geojit Financial Services.)
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