Possibility of major US hurricanes, hotter-than-normal US summer weather and robust core demand v/s supply will impact natural gas prices over the next six months
Natural gas has seen some violent moves in the past few weeks. It rose by 30% in five weeks, but has declined by 5% in the last couple of days. Traded on the Multi Commodity Exchange, natural gas price increased from Rs175 per MMBtu on 30th April, to Rs235 per MMBtu on 5th June this year. What are the reasons for this and will prices keep rising?
This kind of volatility is natural in natural gas. For instance, from 5 July 2008, its price crashed from Rs591.80/MMBtu all the way to Rs118.60/MMBtu on 5 September 2009, a fall of 80%. Gas price has been trading within a range for the next eight months before the recent volatile move. What are the reasons for such sudden price movements and what does the future look for this commodity?
There are three reasons: possibility of major US hurricanes, hotter-than-normal US summer weather and robust core demand v/s supply. We explore the three major variables that will impact the natural gas price in the next four-six months.
Natural gas prices rose last week after the US government forecast up to 14 hurricanes, second only to a record 15 storms in 2005 when hurricanes Katrina and Rita had shut offshore oil platforms for weeks and some refineries for months.
Analysts say high US inventories and industry preparation should temper energy price swings even if storm-related disruptions to oil and natural gas facilities on the level of those seen in 2005 and 2008 would cut the supply overhang.
"From a supply standpoint, we're probably better prepared for an active hurricane season than we have been in the last 20 years. The surplus in inventory has already decreased the hurricane premium in the market, estimating that without high inventories, crude, product and natural gas prices would all be slightly higher," said a Reuters report.
The hurricane season runs from 1st June through 30th November and often affects the Gulf of Mexico, home to about 30% of US oil production, 12% of natural gas production, and 40% of US refinery capacity. Storms may hit a larger overall portion of the US refining sector as more capacity is concentrated on the Gulf Coast after economic shutdowns on the East and West Coasts. "We have a few more eggs in one basket. The amount of crude, natural gas, and product inventories could prove irrelevant if a significant amount of energy demand is knocked out by severe storms," said the report.
Colorado State University researchers said on 2nd June that there is a 76% chance that a major hurricane, with winds of 111 mph (178 kph) or greater, will strike the US this year. The past-century average is 52 percent. "A hurricane could disrupt industrial activity and power generation in the south, throwing a stronger punch to demand than to supply," said the report.
The second reason natural gas prices rose last week was that forecasts showed hotter-than-normal weather across much of the US next week, boosting demand for the power-plant fuel. High temperatures will stretch from the Southwest to New England according to MDA Federal Inc's EarthSat Energy Weather. About 21% of electricity is generated using natural gas, according to the US Energy Department. Natural gas fell almost 5% over the past couple of days after revised forecasts showed cooler weather for the US Midwest and Northeast, reducing demand for gas-powered electricity for air-conditioning. Temperatures next week will "fall to at least normal, if not below" average, according to MDA Federal Inc's EarthSat Energy Weather.
The third reason is robust core demand as opposed to supply. Manufacturing in the US has expanded for the 10th straight month. According to a US Labor Department report, factories across the US added about 101,000 to their payroll during the first quarter of 2010. Don't be surprised to see the supply-demand picture start to brighten next year... And if that's the case, we'll easily see natural gas prices rebound.
On the supply side, the energy production landscape has shifted in recent years. A greater percentage to onshore sources and better industry preparations should soften the impact of hurricanes, experts said. Back in 2005, the US was not producing gas from shale at the current level. There's been a boom in onshore natural gas production since 2005. Thanks to the rise in unconventional shale deposits during the past few years, the US finally overtook Russia as the world's largest gas producer-and that's to be expected after US shale gas production jumped 71% between 2007 and 2008.
According to Bloomberg, the number of US oil and gas rigs operating in the Gulf of Mexico dropped by half last week to a 16-year low. The number of natural-gas rigs dropped by 20 to 947. The US government started to curtail offshore drilling and it is going to impact gas supply and prices. The halt in deepwater drilling in the wake of the BP oil spill took the Gulf rig count to 23 last week, the lowest level since August 1993, from 46 a week earlier. About 11% of US gas is pumped on federal leases in the Gulf. According to the US EIA short-term energy outlook, sustained low natural gas prices this summer are expected to contribute to a decline in natural gas drilling activity over the next several months. As a result, the current 2011 forecast of higher prices comes as production begins to decline later this year and the next. The projected Henry Hub spot price averages $4.49 per MMBtu in 2010 and $5.06 per MMBtu in 2011.
Natural gas has gained prominence in India too as in the rest of the world over the last decade. India has consumed around 41.4 billion cubic metres (bcm) of natural gas in 2008, of which domestic production is 30.6bcm and imports as LNG have been 10.79bcm. The share of imports is expected to increase in the coming years and cross 30% from the current level of around 25%. Fertiliser (41%) and power (37%) are the major users of natural gas in India. The fertiliser sector in India is highly subsidised by the government and it fixes the rate at which natural gas is provided to the fertiliser-manufacturing units. So, as all these factors collide, expect more volatility.
The EGoM may decide to free petrol price from government control for the first time since 2004. Also on the cards is a Rs25 per cylinder hike in domestic cooking gas rates in an effort to align retail prices closer to their cost
An Empowered Group of Ministers (EGoM) may meet on 17th June to consider freeing petrol prices from government control and possibly giving limited autonomy to oil firms to price diesel closer to market rates, reports PTI.
Also on the cards is a Rs25 per cylinder hike in domestic cooking gas (LPG) rates in an effort to align retail prices closer to their cost, sources in know of the development said.
The EGoM headed by finance minister Pranab Mukherjee may decide to free petrol price from government control for the first time since 2004, when the UPA in its first stint decided to price auto fuels below their imported cost to keep inflation under check.
This move, going up by the current international crude rates, will result in a Rs3.35 per litre increase in price of petrol in Delhi, sources said.
The EGoM, which could not reach a decision at its first meeting on 7th June as key ministers like railway minister Mamata Banerjee and agriculture minister Sharad Pawar were absent, may also decide to give oil companies freedom to price diesel if international oil price stayed below $90 per barrel.
If approved, diesel rates would immediately rise by Rs3.49 per litre as current retailing selling price is calculated on $60 per barrel-level of crude oil prices while the actual rate is $72 per barrel now, they said.
If crude climbs to $90 per barrel, diesel price in Delhi would rise by over Rs7 per litre over the current selling price of Rs38.10 a litre.
Petrol in Delhi currently costs Rs47.93 per litre.
The government would step in if crude oil crosses $90 per barrel and prices would be moderated either through cut in excise and customs duty or through subsidy from exchequer.
Sources said there may not be any problem in freeing pricing of petrol, which is considered a fuel used by the well-off, there were doubts on diesel which is used in transport sector and thus has inflationary impact.
If consensus at the EGoM is against even giving limited freedom to oil companies, then the government may settle for a Rs2 per litre hike and try to build consensus for freeing the fuel around budget time in 2011.
Ms Banerjee, who was away in Kolkata at the time of the first EGoM meeting, had communicated that her party, the Trinamool Congress, was against "any steep hike" in diesel prices and wanted domestic LPG and kerosene consumers to be spared, the source said.
Mr Pawar, not known for blocking reforms, could not attend the meeting because of illness, while DMK leader and chemicals and fertilizer minister M K Alagiri was present.
The EGoM had at the first meeting gone into the report of the expert group headed by Kirit Parikh that called for freeing petrol and diesel prices and a steep Rs100 per cylinder hike in LPG rates and a Rs6 per litre increase in kerosene prices.
The oil ministry made a presentation on the impact of the Parikh Committee's recommendation, projecting a revenue loss of Rs72,300 crore to state oil firms if petrol, diesel, domestic LPG and kerosene continue to be sold at rates below the imported cost.
The EGoM also discussed the impact implementing the committee's report would have on inflation, sources said, adding that freeing auto fuel prices would lead to a 1.4% rise in the Wholesale Price Index (WPI).
In April, WPI-based inflation was 9.59%.
State-owned Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum currently lose Rs203 crore per day on selling fuel below imported cost. They currently sell petrol at a loss of Rs3.35 a litre, while the under-recovery is Rs3.49 per litre of diesel, Rs18.82 per litre of public distribution scheme (PDS) kerosene and Rs261.90 on every 14.2-kg LPG cylinder.
The government is proposing to amend the licence norms of telecom service providers to incorporate the condition that the dependence on foreign engineers for maintaining telecom networks in the country would be reduced to nil in two years
Amid debate over security concerns relating to telecom equipments by Chinese vendors, the government is proposing to make it mandatory that only Indian engineers would operate and maintain the networks, reports PTI.
The government is proposing to amend license of Telecom Service Providers (TSPs) to incorporate a condition that the dependence on foreign engineers for maintaining telecom networks in the country would be reduced to nil in two years.
As per the proposed amendment, the Department of Telecom (DoT) has said "The licensee (telecom firm) should work towards a phased plan to take over the maintenance of the equipment locally... The operations and maintenance of networks should be entirely by Indian engineers and dependence on foreign engineers should be minimal and or almost nil within a period of two years from the date of this amendment."
The government had earlier asked operators to take security clearance before buying any key telecom gear. The telecom operators had been complaining about the strict rule, which forced the DoT to be very selective in giving approvals for equipment purchase.
The new amendments also made room for an Escrow deposit arrangement between the equipments suppliers and the telecom service providers wherein the suppliers shall keep all the information and documentation in relation to the supplies.
The information would include "without limitations, in respect to hardware, software, all source code, high level designs, detail design documents, listings and programmers note," it added.
The service providers shall have the right to use the escrow information, after its release, in order to use and maintain (including to upgrade) the software, to modify or have modified the software and to licence such modified software to or have it maintained by third parties.
However, it is yet to be ascertained that the new amendments are going to make it easier for foreign equipment vendors, especially Chinese vendors to supply gears to Indian operators.
The proposed amendment will also allow the telcos to allow third party (other than employees and servants of telecom service provider) to supply equipments and have access to the network only after a putting in place a legal agreement between the two with regard to security issues.