Sagging demand may lower natural gas prices The fall is due to the piling inventories, which have resulted from the slowdown in the global economy.

Fossil fuels have been powering the world for more than a century. Though coal and crude oil dominate the nonrenewable energy segment, the usage of natural gas has been increasing steadily due to the rising concern over emissions leading to global warming. Natural gas, an odourless and colourless fossil fuel, contains largely methane and emits lesser carbon dioxide on burning than coal and crude oil, which emit 45% and 30%, respectively. Natural gas is found deep under the earth in oil fields and coal beds, and is measured in billion cubic metres (bcm). If the gas contains hydrocarbons other than methane, it is called wet natural gas, but if it has only methane, it is termed dry natural gas. At the end of 2011, the world's natural gas reserves stood at 208.4 trillion cubic metres compared with 196.1 bcm discovered till the end of 2010. 

    The world production of natural gas has increased at a compounded annual growth rate (CAGR) of 2.46% since 2005 and was 3,276.2 bcm in 2011. Of this, the US contributed 19%, closely followed by Russia at 18.4%, Canada at 5% and Iran at 4.3%. India had a marginal share of 1.4%. The increase in global production, especially in the US, was due to technical improvement and continued drilling in the shale plays, areas that have a high concentration of natural gas and crude oil. The supply in the US grew at 7.7 % in 2011. A significant rise in output was also witnessed in Qatar and Russia. 
    The global consumption of the fossil fuel has witnessed a marginal growth at a CAGR of 2.17% since 2005 and stood at nearly 3,222.9 bcm in 2011. The consumption slumped in 2009 to 2,930.6 bcm due to the slowdown of the global economy. However, it has gone up again over the past two years due to the implementation of new environmental regulation, which emphasises the reduction in emission of sulphur dioxide and nitrogen oxide. The consumption in North America grew by 3.2% in 2011 compared with that in 2010 as lower prices drove the demand for the fuel. The consumption in China, Saudi Arabia and Japan grew by 21.5%, 13.2% and 11.6%, respectively, but fell to 9.9 % in the European Union due to the weak economy, high prices of gas and the financial debt crisis. The per capita consumption of natural gas in India was 43.11 cubic metres in 2011. 
    On the domestic front, the production of natural gas, which stood at around 26.4 bcm in 2000, increased to 46.1 bcm in 2011, but was lower by 9.1% compared with that in 2010. Two-thirds of the demand for natural gas is derived from the power and fertiliser sector, which consumed 61.1 bcm in 2011, a CAGR of 7.98% since 2000. 
    The price of natural gas rose sharply in 2005 due to a decline in supply and disruption in distribution triggered by the damage caused by hurricanes Katrina and Rita. The prices touched a peak of $15.73 million metric British thermal units (mmBtu) in December 2005, but fell afterwards. They began torebound from 2007 and touched a high of $13.58 mmBtu in July 2008. However, the supply of natural gas has been rising since mid-2008 and even outpaced demand, which led the prices to subside and fall to $2.51 mmBtu in 2009. Overall, the average yearly prices remained under pressure with slight ups and downs. The prices have witnessed a slight rise in the past few months with the start of the hurricane season ( June-November) in the US despite sufficient inventories. 
    In the coming months, the prices are expected to remain range-bound with a negative bias because of piling inventories as demand sags due to the slowdown in major economies. However, any major halt in production in the US due to the ongoing hurricane season might support an upside in the prices. 
Tips for first-time investors 
Besides demand-supply fundamentals, investors should keep track of the natural gas inventories, economic health of major consuming nations, new discoveries of gas wells and proven reserves of major economies. Along with these, they should closely monitor currency fluctuations, weather conditions in the US, particularly during the hurricane season, and the rising fuel demand from China, before taking any investment decisions. 
Trading strategy 
Prices are trading at around 162 mmBtu and are expected to hover in the range of 150-190 mmBtu in the medium term. 
The writer is Associate Director, Commodities & Currencies, Angel Broking