Crash in natural gas futures may soften LNG prices

Does the crash in natural gas derivatives at New York Mercantile Exchange (NYMEX) mean anything for Indian natural gas buyers?

Well, a continuous fall in natural gas futures in the US indicates possibly less demand for LNG in that country in the upcoming winter, and this could have a positive spin-off for Indian buyers in the spot market.

The supplies of natural gas and other fuel had jumped to an unprecedented level in the US, causing natural gas prices to plunge 62 per cent in the past 12 months. Natural gas for October delivery at NYMEX natural gas futures declined 7.1 per cent last week to $4.62 per million British thermal units.

The prices were down nearly 40 per cent from a peak in early August, which led to a $6-billion loss for US-based hedge fund Amaranth Advisors LLC.

In India, for the minuscule minority that uses natural gas supplied at market determined price (most get it at a controlled price), a variation in NYMEX natural gas futures may not mean much as, for them, the suppliers change price on an annual basis or at the end of the contract period, which varies from customer to customer.

The Panna-Mukta-Tapti consortium, which supplies gas to consumers at market rates, also faces lots of constraints when it decides on price revision.

However, a mild winter in the US and part of Europe, coupled with increased supply of natural gas in the US market, may keep US spot buyers away from the market where Indian consumers are competing with the Japanese and Koreans.

"If the higher inventory level continues in the US, it may soften the LNG spot cargo prices by $2 to $2.5 during the next couple of weeks, which, in turn, will help Indian buyers that are left with a limited option," said an analyst.

All the same, a lot will depend on the inventory level in the US in mid-October and the demand for LNG in that country. Although LNG constitutes merely 5 per cent of the total US natural gas supply, this is on an upward trend.

The global LNG market is also affected by external factors like Indonesia's inability to honour some long-term LNG supply commitments to Korea and Japan, which may adversely affect Indian buyers' chances.

The Russian environment agency's decision last week to cancel the licence given to Sakhalin-II has also put the LNG market on tenterhooks.

Large consumers like Korea and Japan are desperately scouting for short-term and medium term arrangements with possible suppliers in the Middle East like Oman and Qatar and Australia in the Pacific rim.