Will Natural Gas Continue To Trade Up?

Includes: UNG
by: Lior Cohen

The price of natural gas (short-term delivery) resumed its upward trend and rose throughout last week. The rise may have been due to the recent increase in demand for natural gas in the residential and commercial sectors. According to the latest EIA report, the first extraction for the season from natural gas storage occurred last week. Will natural gas continue to rise? Let's examine the recent developments in the natural gas market.

During the previous week, the future price of Henry Hub (short-term delivery) hiked by 8.3%. Moreover, United States Natural Gas (NYSEARCA:UNG) rose by 8%. Despite the recent rise in the price of natural gas, it didn't seem to curb the fall of major natural gas and oil producer stocks such Chesapeake Energy (NYSE:CHK): Last week, shares of the company declined by 2.5%.

The chart below presents the shifts in the price of natural gas during the past couple of months. As you can see, natural gas prices bounced back and rose during recent days.

Click to enlarge images.


According to the latest EIA weekly report, natural gas extraction from the underground natural gas storage was 18 Bcf, which was the first extraction this season. In comparison, during the same week last year there was an injection of 12 Bcf. Moreover, the five-year average injection was 17 Bcf. The current storage is at 3,911 Bcf for all lower 48 states, which is only 5.6% above the five-year average and 1.8% above last year's level. The extraction was mostly due to an extraction from the Weekly Eastern Consuming Region storage.

The gap between the current storage levels and five-year average storage contracted compared to the previous week. In the past, the extraction season tends to start at the end of November. This early extraction could suggest the gap between past storage levels and current storage levels could further narrow in the weeks to follow.

If the 2012 storage buildup is over, assuming there won't be additional injections in the next couple of weeks, then it seems as if 2012 (between April and November) storage is expected to be the smallest since 1991, according to the latest EIA monthly report. The table below presents the buildup in storage between April and November for the past several years. As you can see, the 2012 buildup was nearly 30% lower than in 2011 and the average past four years.

The number of weeks with injections in 2012 wasn't much different from past years, but the average injections per week was nearly 28% lower than past years' average injections.


From the demand side, last week average U.S. NG consumption slightly increased by 0.4%. The residential/commercial sector led the rise again with a 2.8% gain (week over week). Conversely, the power sector's NG demand fell by 2.3% (week over week). Finally, the industrial sector's demand slipped by 0.5% (week over week). As a result of these changes, the total demand for NG rose by 0.4% compared to last week's levels. Finally, the total demand was still 8.5% above the demand levels during the same week in 2011.


On the supply side, gross natural gas production declined again by 0.4% during last week; it was still 1.8% above the production level in 2011. Moreover, imports from Canada fell by 6.4% (week over week); the imports were also 3.4% lower than the same week in 2011. The total U.S. NG supply declined on a weekly scale by 0.8%. Finally, the natural gas rotary rig count rose by four to reach 417 rigs. Therefore, the NG supply contracted again during last week.

Based on the above, during last week the natural gas supply contracted while demand slightly grew. Thus, the natural gas market has slightly tightened again compared to last week.

Weather Is Getting Colder

Following Hurricane Sandy and the following Northeastern storm, low temperatures -- mainly in the Northeast -- are probably among the reasons for the rise in demand for natural gas. There is still a drop in the power sector on account of the recent blackouts in the Northeast and the shift from natural gas to coal due to the increase in the price of natural gas.

During the past week, U.S. temperatures (on a national level) were 1.6 degree cooler than the 30-year normal temperature and were 1.1 degrees cooler than the parallel week in 2011. There are reports that project temperatures will further dwindle in the Northeast and stormy weather will increase in the Southeast, which could increase demand for natural gas for heating purposes. This may also increase the extraction rate from natural gas storage. If temperatures continue to fall, the demand for natural gas is expected to rise during the week.

So What's Ahead for Natural Gas?

Based on the recent developments in demand and supply, the natural gas market has tightened again, which could suggest the price of natural gas will continue to rally. There is a seasonal shift that could lead to high volatility in the natural gas market. Nonetheless, there are still expectations for a normal winter. If the natural gas storage levels continue to fall, this could further pressure the price of natural gas up. Note that this week the EIA won't publish its weekly report on account of Thanksgiving. The recent power shortage due to Hurricane Sandy and the recent rise in prices of natural gas may further pull down consumption in the power sector. The storage level remains higher than last year's levels, but the gap continues to close. If the gap continues to shrink, it could contribute to the rise of natural gas prices.

If storage continues to decline, if supply further dwindles, and if demand for natural gas continues to increase, then the natural gas market is likely to further tighten. This could lead to another rise in the prices of natural gas in the days to follow.

For further reading, see "Will Oil Reach A New Low By the End of 2012?"

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.