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May 2016

Natural gas may remain in a narrow range as record stockpiles and subdued demand weigh on prices, says Dharmesh Bhatia, Manager – Commodities Market, Emirates NBD Securities

Investors are now bidding natural gas futures higher on the expectation that the market has bottomed. Natural gas prices are experiencing a late season rally, while a late season cold snap added some extra impetus. This leg higher was inspired by a late US season cold rally. Weather forecasts show colder-than-normal weather settling in to major Midwest and East US Coast heating markets through mid-April. That late-season heating demand could result in low storage additions, to may even come in at record lows. After hitting eight-week high $2.07 million British thermal units (MBTU) on last month, front-month May gas futures on the New York Mercantile Exchange closed down to $2.01 per MBTU. US energy information administration (EIA) forecasts that gas prices will increase to $3.31 by the end of 2017 but that is overly conservative because it assumes an immediate and improbable return to production growth once the supply deficit and higher prices are established.

Production companies are in financial distress and are unlikely to return to gas drilling at the $2.75 price that EIA forecasts for November 2016. The oil-field service industry is in disarray and is probably unable to reassemble drilling and fracking crews and equipment in less than 6 to 12 months after demand resumes. There are currently on 92 rigs drilling for gas. That is 150 rigs less than the previous record-low set in 1992. Production cannot be maintained at this level despite unrealistic faith in drilling efficiency and spare capacity from uncompleted wells. Natural gas equities have posted “strong” performance in the past few weeks because there’s greater confidence that gas prices will improve over the course of 2016. Spot prices at the Henry Hub benchmark in Louisiana have averaged $1.96 so far this year, the lowest since 1999, while futures for the balance of 2016 were fetching $2.26. That compares with an average of $2.61 in 2015, the lowest since 1999.


US drillers have already cut back on dry gas output, producing on average 73.1 bcf per day so far this year versus a record high of 74.2 bcfd in all of 2015, according to US federal data. The US power sector, meanwhile, has burned about 24.4 bcfd so far this year versus 22.8 bcfd during the same time in 2015. After using a record amount of gas to generate electricity in 2015, the power sector was expected to use more gas than coal to generate power for the first time this year, according to federal estimates. A hot summer would also help absorb some surplus gas, with temperatures expected to be 18% higher than normal in July and 9% higher in August. Expect production would have to rise in 2017 to encourage drillers to boost production to meet forecast growth in exports and industrial demand. All-in, the US LNG landed price in Asia today “likely” is running around $7.50-9.50, depending on the Henry Hub gas price and transport costs.


Natural gas continues to trade above $1.9/mmBtu level. Natural gas may remain in a narrow range amid mixed cues. With slack demand spring season ahead, price may remain in a range as well. Weighing on price is near record high gas stocks in US storage. Weather related demand is also expected to wane with end of high demand winter season. Any surge in demand will be temporary and may not result in sustained price gains. Gas may however remain supported by higher demand from power sector as gas trades at a discount to coal price. Cheaper gas price increases incentive to use gas for power generation. Decline in rig count also shows weaker production interest. NYMEX gas may trade in a range of $1.85-$2.04/mmBtu. Focus will be on US weather and trend in crude and coal price. Inventory report will be watched to see the pace of stock build with the start of injection season.

Outlook for Crude Oil

Crude oil has corrected sharply after testing $42 per barrel. We expect price to remain choppy amid mixed cues. Global crude supply remains high but we are seeing divergence between US and other production. US crude stocks are at record high level and are expected to rise further even as pace has slowed down. However, US crude production has continued to fall and has tested the lowest level since 2014. US crude rig count has also slumped to the lowest level since 2009. OPEC production rose marginally last month while Russia production has surged to the highest level in thirty years. Saudi has also stated that it will not agree to production freeze unless Iran agrees. This shows that oil producers are not willing to act before a crude production is approved by all. While supply issues remain a cause of concern, Fed uncertainty has rattled financial markets. US equity markets have however managed to gain showing optimism about US economy. US economic optimism is supportive for crude as US is a major crude consumer however economic optimism will also underpin US dollar which will weigh on price. Focus will be on US economic data which will affect US dollar as well as outlook for Fed’s monetary policy. Also in focus will be weekly inventory report. NYMEX WTI crude may trade range bound.



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