Downward push on gas prices builds up

What's Up: Natural gas prices are coming under pressure again, ahead of a flood of supply expected to reach the market at the end of the month.

Production data shows the pace of natural gas supply growth has not slowed. AFP

Natural gas prices are coming under pressure again, ahead of a flood of supply expected to reach the market at the end of the month.

The UAE may be facing a shortage of cheap, readily available gas, but globally, natural gas prices are being squeezed by oversupply.

Barclays Capital said the market could be flooded with excess product at a time when demand for gas for heating is diminishing as the northern winter wanes.

With the weather in the United States this month expected to stay unseasonably warm, the excess gas would need to find a home by undercutting coal, suggesting the gas market would need to balance at even lower prices.

Another knock-on effect, if storage operators are not disciplined enough to enforce contracts for gas to be withdrawn, is that gas stock rebuilding would begin while current levels are already high. Storage is already at 57 per cent of capacity, according to Barclays Capital.

"This outcome will likely put tremendous pressure on the rest of the contracts in 2012, especially the October contract, as the market fears even normal weather in the summer could mean that the market is on track to end October with storage beyond capacity," the bank's analysts said in a note.

Production data shows the pace of supply growth has not slowed. As a result, natural gas futures at the Henry Hub, the benchmark US pricing point and delivery point for New York Mercantile Exchange Index, were down 0.99 per cent yesterday to US$2.30 per million British thermal units, the biggest fall in a week. This is down from $3.084 at the start of the year.

Still, few producers forecast outright production declines for the year. On the demand side, the macro backdrop in the US continues to improve.

But for now, natural gas looks set to take a back seat in investors' portfolios.

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