Crude oil punters shift positions to natural gas after negative price row

According to the MCX data, the share of natural gas in the total volume of the exchange has almost tripled, while that of crude has reduced by more than half

Following the controversy over the Multi Commodity Exchange (MCX) settling the April contract for crude oil in negative territory, several traders have shifted their positions from petroleum to natural gas. When the last month's contract expired on April 20, the share of crude oil in the exchange’s turnover was 29.4 per cent, while that of natural gas was 6 per cent. This has now changed significantly in favour of gas.

According to the MCX data, natural gas' share in the total volume of the exchange has almost tripled; the crude oil share has shrunk by more than half. Many big brokers have discontinued trading in crude oil after the MCX settled the price of the April contract at –Rs 2,884 per barrel, against the official close of Rs 995. This was unusual as the MCX system was not enabled for trading in negative territory. 

Several top volume generators incurred heavy losses following the move and as a result, many of their clients discontinued trading in crude oil derivatives on the MCX because prices remained volatile.  Ajay Kedia, director, Kedia Advisory, said:  “Amid concerns over the WTI crude oil prices turning negative and a sharp rise in the margin in MCX crude oil, traders are looking into other energy products (such as natural gas). Record low prices in years of crude oil and natural gas in March and April and the credit crunch for energy producers are likely to weigh on the output over the coming weeks and months.”

 

 

The trend in stockpiles where both percentage above last year’s level and five-year average could be a sign of declining output as the injection season is now underway. The number of rigs operating in oil and gas regions of the US has been declining, which is not bearish for the price of natural gas. “Though natural gas prices are quite cheap and margins are low, fundamentals are turning positive and that's why traders are attracted towards in the commodity,” said Kedia.

Initially, volumes increased but now even open interest is building up in natural gas' contracts. These are also cash-settled contracts. On Tuesday, the natural gas price increased by 6.24 per cent to trade at Rs 160. Crude oil on the MCX was trading higher by 19.61 per cent at Rs 1,860 per barrel (11.05 pm). 

The natural gas contract success depends on how the cost of carrying declines going forward. This because the June contract is still trading 10 per cent higher than the May expiry contract, and 10 per cent cost for carrying forward position to next month is considered too high.
 

Crude oil prices witnessed sharp recovery on demand growth prospects as some countries have eased lockdown. It’s net cash holding and receivable book size, are 70 per cent and five times, respectively of the market cap.