Commodities | Mar 25 2009
By Chris Shaw
According to Barclays Capital natural gas inventories will be something in the order of 1.6 trillion cubic feet at the end of winter in the northern hemisphare and while this is lower than the group had expected at the start of the season, it remains a bearish outcome.
This means while Barclays sees the market as eventually moving back into some sort of equilibrium this has not yet been achieved. Production is gradually declining supply but is remaining solid and it should continue to do so at least until the second half of this year on Barclays projections.
The fall in production reflects lower demand given the weaker economic environment, with Barclays suggesting industrial demand in particular is not likely to recover anytime soon. As well, the group expects power consumption will use less gas in year-on-year terms as gas is the marginal source of fuel in many regions, so when demand generally is trending lower, as is currently the case, demand for gas is inordinately affected.
The supply side will also have an impact on the market balance as while US output is currently on a downward trend, production in the rest of the world is increasing. This suggests a solid level of imports into the US market.
With demand currently weak this means upward pressure on inventories and the group is forecasting an end of summer inventory of 3.9 trillion cubic feet. This is enough in its view to test the US’s storage capacity, which it estimates is currently around 4.2 trillion cubic feet. This keeps the bias of market factors to the bearish side.
As expectations adjust prices have been volatile, Barclays noting over the past week prices for the prompt month (April) prices have gone from a fall to levels last seen in September of 2002 to a rally of some 17%. The end result has been a gain of around 12%. Cash prices are now trading close to futures levels.