Natural gas prices are near 1-year highs as the peak winter season approaches

Natural gas prices rose more than 25 percent in November, boosted by forecasts of colder weather and increased heating demand in major consuming countries. A similar price trend was observed in major Asian and European markets as well. The recent rally has been attributed to active restocking of rapidly dwindling natural gas inventories in Europe and Asia amid the peak heating season.

Additionally, there are expectations that average temperatures in major natural gas markets, including China, Japan and Europe, will fall below long-term averages this year. This could lead to a synergistic increase in demand for natural gas-fired heating, which could further increase prices.

At the same time, high storage levels in the United States continue to put pressure on prices. As the world’s top natural gas producer and consumer, the United States’ production currently exceeds its consumption by about 13 percent.

According to a report by the Energy Information Administration (EIA), US natural gas inventories are at their highest level since 2016, with natural gas currently operating at 6 percent more storage than the five-year average.

The commodity has maintained an overall negative outlook over the past few years, with prices fluctuating between $1.40 and $3.65 per MMBtu on the WTI futures platform. This was driven by a complex interplay of supply and demand dynamics that negatively affected fuel performance. In March 2024, prices fell to a four-year low due to demand and surplus supply but later saw a modest recovery. In domestic MCX futures, in November Rs. 297 in March before recovering to Rs. It touched a low of 128.50.

The US And the lower heating needs of key consumers such as the Eurozone, the industrial slowdown in Europe and the decline in demand due to record-high production and exports from the US, negatively impacted the overall outlook for the fuel.

Weather conditions can have a significant impact on natural gas demand. Last year, warmer-than-normal temperatures in Europe and the Americas during the peak season reduced consumption. However, current forecasts of colder weather in the US and Europe are expected to increase heating demand and potentially support higher prices.

Demand for European natural gas continues to decline due to energy efficiency measures, the adoption of renewable energy and a reduced dependence on Russian gas. Current data indicates that Europe’s annual natural gas demand is around 330 billion cubic meters (BCM). However, the International Energy Agency (IEA) projects that global natural gas demand will grow at a stronger rate in 2024 than in the previous two years. The IEA predicts that demand will increase by more than 2.5 percent in 2024, with similar growth expected in the following year.

Fast-growing Asian markets and a potential rebound in European industrial gas demand are expected to drive this growth. EIA forecasts limited new gas supply in 2024 due to slower production growth, while ongoing geopolitical tensions may contribute to price volatility.

(Haresh V is Head of Commodities at Geojit Financial Services)