The price of natural gas (short term delivery) continued its rally throughout the previous week. The ongoing increase may have been due to the recent rise in demand for natural gas in the residential and commercial sectors. The EIA didn't publish its report last week so there is no update regarding demand, supply and storage. Based on the currently available information will natural gas continue to trade up? Let's examine the recent changes in the natural gas market.
During last week, the future price of Henry Hub (short term delivery) rose by 2.93%. Moreover, United States Natural Gas (NYSEARCA:UNG) also increased by 3.2%. The recent rally in the price of natural gas, may have contributed to the recent rise in major natural gas and oil producers' stocks such Chesapeake Energy Corporation (NYSE:CHK): During the previous week, shares of the company increased by 7.3%.
The chart below shows the developments in the price of natural gas during recent months. As seen, natural gas prices rose during recent weeks.
The EIA didn't release its weekly update most likely on account of Thanksgiving holiday. According to the previous report the underground natural gas storage is at 3,911 Bcf and there was a first extraction of 18 Bcf. The current storage for all lower 48 states is only 5.6% above the 5-year average and 1.8% above 2011 level. Due to the cold weather there might be additional extractions in the weeks to follow.
This means, if the 2012 storage buildup has ended, then the current storage level isn't much higher than last year's storage level and unless there will be smaller extractions than in the previous years the gap between current storage level and recent years' levels will continue to narrow.
According to a recent report, the natural gas rotary rig count increased again by 11 and reached 428 rigs. The recent moderate rise in number of rigs could suggest there is a chance in the direction of natural gas production.
The Contango Has Contracted
The recent rise in the prices of natural gas seems to have been anticipated in the future markets. The chart below shows the gap between the one month ahead future price (herein: short term) and the prices of two, three and four months ahead future prices. The sharp drop in the gaps tends to occur at the end of the short term contact (i.e. at the end of each month). As the gap between the short term price and the other future contracts expands, this suggests the market expects the price of natural gas will rise in the future.
During September and October and difference among these contacts reached their highest level this year so far. This could explain the sharp rise in the prices of natural gas during the past several months. Nonetheless, during November the gap among these contracts remained stable and hasn't risen. This could suggest the market has yet to determine if the prices of natural gas will continue to increase during the upcoming months. Perhaps as we will enter the winter, and the uncertainty around the expected demand for natural gas will dissipate (the "type of winter" is likely to determine the amount of natural gas consumed), then the market will reveal its expectations in the near future for natural gas prices.
Is the Weather Getting Colder?
There are mixed signals regarding the forthcoming weather. One report forecasts there will be normal weather during the week that could lower the demand for natural gas for heating purposes. Another report projects the weather will get colder in the next several days. This uncertainty around the weather, the unpublished EIA report could be responsible around the uncertainty in the future markets as indicated above.
According to the weather report, in the following days there could be a drop in temperatures mainly in the Midwest and Northeast. If this will be the case, the demand for natural gas could further rise.
So what's next for natural gas?
There still seem to be a seasonal shift that could lead to high volatility in the natural gas market and a rise in the prices of natural gas. The mixed signals regards in the direction of the weather in the near future, could curb the recent rally in the prices of natural gas. Nonetheless, I still think the general direction will continue to be upward. Therefore, there might be some corrections along the way but I still guess natural gas will further rise in the days to follow.
For further reading see "Will The Rally of Natural Gas Help Chesapeake?"