Where Is Natural Gas Headed?

| About: The United (UNG)

The price of natural gas (short term delivery) continued to zigzag with an unclear trend in recent weeks. The high volatility might have been caused by the uncertainty around the effect of Hurricane Sandy on the natural gas market. The demand for natural gas in the power sector declined, in part, due to power failures in the Northeast. Conversely, the demand for natural gas in the residential and commercial sectors increased in certain cold regions. According to the latest EIA report, natural gas injection was lower than last year's injection and the 5-year average injection. There are some analysts who expect the price of natural gas will rise, while others think the price will go down. What's next for natural gas? Let's examine the recent developments in this market.

During last week, the future price of Henry Hub (short term delivery) declined by 1.4%. Moreover, United States Natural Gas (NYSEARCA:UNG) decreased by 1.1%. The recent fall in the price of natural gas might have contributed to the decline of major natural gas and oil producers' stocks such as Exxon Mobil Corporation (NYSE:XOM). During last week, the shares of the company declined by 3.4%.

The chart below shows the developments in the price of natural gas during recent weeks. As seen, natural gas prices shifted with an unclear trend.

(click to enlarge)Click to enlarge


According to the recent EIA weekly update, natural gas injection to underground natural gas storage rose by only 21 Bcf, which was lower than the injection during the same week in 2011 - back then it was 37 Bcf. Moreover, the injection was also 6 Bcf lower than the 5-year average injection. The current storage is at 3,929 Bcf for all lower 48 states, which is nearly 6.6% above the 5-year average. The gap between the current storage levels and 5-year average storage slightly contracted compared to last week.

The storage buildup during 2012 (between April and November) is expected to be the smallest since 1991, according to the recent EIA monthly report.

The table below presents the buildup in storage between the middle of March and the beginning of November for the past several years.

As seen, the 2012 buildup was nearly 30% lower than in 2011.

The chart below shows the shifts in the U.S natural gas storage and the weekly price of natural gas (spot) between the 2010 and 2012.

Click to enlarge


From the demand standpoint, during the previous week, the average U.S NG consumption rose again by 7.5%. The residential/commercial sector led the charge again with a 22.9% rise (week over week). Conversely, the power sector's NG demand declined by 3.7% (week over week). Finally, the industrial sector's demand increased by nearly 1.6% (W-o-W). As a result of these sharp shifts, the total demand for NG rose by 7% compared with the last week's levels. Finally, the total demand was also 5.2% above the demand levels during the parallel week in 2011. According to the recent monthly report of the EIA, the consumption of natural gas is expected to be nearly 22% higher in 2012 compared to 2011.


From the supply standpoint, gross natural gas production slipped by 0.5% during the previous week; it was also 1.7% above the production level in 2011. Alternatively, imports from Canada declined by 7.8% (week-over-week); the imports were still 5.1% lower than the same week in 2011. Moreover, total U.S natural gas supply declined on a weekly scale by 1%. Finally, the natural gas rotary rig count fell by 11 and reached 413 rigs. Therefore, the NG supply slightly contracted during last week. According to the EIA monthly report, the production of natural gas is expected to grow slower in 2012 and 2013 compared to 2011. Moreover, there is an expected decline in production in the following months on account of the drop in rig count.

So during last week, the natural gas supply slightly contracted while the demand expanded. Thus, the natural gas market has tightened compared to the previous week.

Milder Weather Up Ahead?

Following Tropical Storm Sandy there was another Northeastern storm that pulled down temperatures that will likely augment the demand for natural gas in the residential/commercial sectors. On the other hand, there is still a decline in the power sector on account of the recent blackouts in the Northeast and the shift from natural gas burning to coal due to the rise in the price of natural gas.

During last week, U.S temperatures (on a national level) were 1 degree cooler than the 30-year normal temperature but were 1.3 degrees warmer than the same week in 2011. There are reports that project temperatures will be around normal or above-normal during the upcoming week. If this projection is accurate this means demand for natural gas is expected to decline during the week.

So what's next for natural gas?

Based on the recent changes in the demand and supply, the natural gas market has tightened which could suggest the price of natural gas will rise. There is a seasonal shift to winter that raises the uncertainty around what kind of a winter the U.S will have this year. This situation, along with the ramifications of Sandy, leads to high volatility in natural gas prices. There are expectations for a normal winter, which could result in an increase in consumption in the residential, commercial and industry sectors. On the other hand, the rise in natural gas prices is expected to curb the growth in consumption in the power sector. These opposite forces are plausibly among the reasons for the high volatility in the natural gas market. The storage level remained high compared to previous years and is expected to start the winter with higher levels than last year.

If storage will remain high compared to previous years, if the supply will further decline, and if the demand for natural gas will continue to rise, then the natural gas market will tighten. This could lead to a rise in the prices of natural gas in the days to follow.

For further reading see "Will Exxon Continue To Trade Up?"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.