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Natural Gas “The Fuel of 21st Century”

 

Natural gas which is known as fuel of 21st century has caught attention across the board in India in recent days with its big see saw movements.  From the high of $13.69 per mmbtu in 2008 it saw a razor sharp fall to the level of $3.11 per mmbtu with the mayhem in financial market. At present, it is on bumpy ride. Back at home, it saw a decline of more than 71%, and is now struggling to bottom out. But the million dollar question is whether it has hit the bottom or yet to hit.
Going forward let me talk about its uses. Natural gas, being a nonrenewable fossil fuel, it is a hot favorite of every human being. It ranks number three in energy consumption
after petroleum because of its uses in power generation, domestic use, fertilizer, aviation and other many more. Moreover, it is commonly used in the production of steel and other metals and in many industrial areas from chemical production to fertilizer apart from other uses. With its greater efficiency and cost effectiveness, it is the most preferred fuel for cooking, transport and lighting. But on the flip side it faces transportation and storage problems because of its low density.
On the demand side, it has massively increased in last two decades. 15 nations account for 84% of the worldwide production and its price varies greatly depending on location and type of consumer. Closer home, its demand has improved in last decade. With this mayhem in the financial market across the board, we have seen a drastic fall in the demand of this item and consequently lead to a fall in natural gas prices. However, world economy has begun to give a glimmer of hope with some improvement in economic data’s and revival in stock market, which is a leading indicator of economy as well. Furthermore, with the expected growth in the use for natural gas for vehicles its prices are likely to increase in future. On supply side, every round of fall in the prices has been resulting in a further decline in natural gas rigs in operation, which may support prices rise at the time when demand will start improving on higher pace.
 
At present, inventory levels are at record level and two things can be the chief driving variable for natural gas. Firstly, the industrial demand, which is not so strong and U.S. Department of Energy has forecasted that industrial consumption of natural gas will decline by 8% this year. Total consumption of natural gas is expected to fall by 2% in 2009 however; consumption will increase in 2010 with expected economic recovery. Secondly, weather; keeping in mind that natural gas-fired generators are very expensive to operate and it is widely used in overseas. Hence, any summer demand could give significant impact on the prices. If west and east coasts experience a mild summer it will limit the demand and vice a versa. Hurricane season has the high impact on the price movements of natural gas as considerable portion of natural gas production is either done in the Gulf of Mexico or stored there. Hence any hurricane strike in Louisiana, Eastern Texas or to the Gulf platforms could put an immediate lift in natural gas prices. Furthermore, it is used mainly for heating in the Northern states during the cold winter months in US, may support prices during that period. Seasonal demand is the highest in this period. If we have a look on average monthly price movements, below chart is also showing that it trades in a higher range during winters. It’s too early to say that it has hit the bottom but if an investor goes for long term then the low of August will be good entry point for buying for long term prospect.
Average Monthly Prices Movement of Natural Gas (From 1990-2008) ($ per mmbtu)
 
Source: SMC
 
Source: SMC
Crude prices are the strongest indicator of energy complex. If we talk about the crude vs. natural gas ratio, during the late 1990s and early 2000s, it was close to 6:1. But, it is around 18:1 at present. Hence the question arises, whether natural gas decoupled with crude oil, which has a strong positive correlation in general. The answer is yes, for the time being it has decoupled. However, we can expect that the ratio should normalize and at the end of this year, it should at least come to the level of 12:1. Consequently, we can say that one should go for buy in natural gas and sell in crude oil. Time factor for this strategy will be crucial and according to the seasonal demand, third quarter or August can be the best month to adopt this strategy.