All's not well in gas futures

MUMBAI: The domestic natural gas market may be buffered to an extent from the steep fall in the international price due to controlled pricing. But the gas futures in home turf, which are closely pegged to the Nymex price, have seen a rapid slump over the past few weeks.

The contract, which was launched on MCX in July ‘06, has seen a drop of close to 40% in the prices in the last month. MCX natural gas for October delivery closed at Rs 273 per mmbtu, compared with Rs 439.40 on August 25, from when the price began to drop mirroring the performance on the New York Mercantile Exchange (Nymex).

In the international market, a number of hedge funds have made unexpected losses after the price fall, and have been forced to liquidate and exit. The US based hedge fund, Amaranth Advisors announced losses of over $6bn since the
beginning of September after poor bets on the movement of natural gas prices. Over $1bn of the losses were made in the past one week.

On the MCX October contract, barring one week between September 8 and September 16, ‘06, the open interest rose from 12,88,000 mmbtu, to 15,12,000 mmbtu on the October contract. This indicates that traders are holding on to short positions.

It would essentially mean that traders are not bullish about the price unless the winter turns out to be unexpectedly harsh. So, they are willing to sell at a higher price and re-enter the market at lower levels, said Ashish Karel, research analyst, Man Financial.

According to Atul Shah, head, commodities, Emkay Commodities, India still largely depends on petroleum for its energy needs, and CNG (compressed natural gas) and LPG (liquefied petroleum gas) are not as widely used. “The MCX price is expected to range between Rs 260 and Rs 280 over the next few weeks,” he said.

In India, the pricing of most of the natural gas is controlled. Only part of the total production, including that produced by private companies like British Gas and Reliance is market driven. Unless there is a huge demand-supply gap prices are unlikely to be affected.

The steep fall in the international price was seen as a reflection of the long overdue fall in the crude price, lack of any weather disruptions in the US, high inventory levels and a slowdown in the US economy, which would affect the consumption of natural gas. The US Federal Reserve is pausing further rate hikes to avoid going into recession.