The price of natural gas (short-term delivery) edged down last week, despite the hike in prices on Wednesday. The recent fall may have been due to the uncertainty around how cold this winter will be, and the recent rise temperatures in many regions of the U.S. The decline in storage, according to the recent EIA report, didn't seem to curb the fall in natural gas prices last week. Based on the currently available information, will natural gas fall further? Let's examine the recent shifts in the natural gas market.
During last week, the future price of Henry Hub (short-term delivery) declined by 0.31%. Moreover, United States Natural Gas (UNG) also edged down by 0.5%. Current prices are nearly $0.3 per million BTUs above natural gas price from the same week last year. The recent fall in the price of natural gas may have curbed to the recent rise in major natural gas and oil producer stocks, such Chesapeake Energy Corporation (CHK) -- last week, shares of the company rose by 1.3%.
The chart below shows the developments in the price of natural gas during November and December. As you can see, natural gas prices moved in an unclear trend in recent weeks.
Click to enlarge image.
According to the recent EIA weekly report, underground natural gas storage declined by 73 and reached 3,804 Bcf. The current storage for all lower 48 states is only 4.6% above the five-year average and 0.9% below 2011 storage. In other words, following last week's extraction, the current storage is now lower than the storage in 2011.
On the demand side, during the previous week average U.S. NG consumption fell by 12%. The residential/commercial sector led the fall with a 23.5% drop (week over week). Conversely, the power sector's NG demand remained virtually unchanged as it edged down by 0.2% (week over week). Finally, the industrial sector's demand slightly declined by nearly 2.1% (week over week). As a result, the total demand for NG fell by 11.6% compared to last week. Finally, the total demand was also 13.6% below the demand during the same week last year.
On the supply side, gross natural gas production slipped by 0.62% during last week, but it was still 0.5% above the production in 2011. Alternatively, imports from Canada rose by 7.4% (week over week); the imports were still 5.2% lower than the same week last year. Moreover, total U.S. natural gas supply edged down on a weekly scale by 0.01%. Therefore, the NG supply remained virtually unchanged during last week. According to a recent report, the natural gas rotary rig count decreased by seven and reached 417 rigs. The recent moderate fall in the number of rigs could suggest a potential decline in natural gas production.
So last week, the natural gas supply remained almost unchanged while the demand sharply fell. Thus, the natural gas market has slightly loosened compared to the previous week.
During November and early December, it's very common to have little change in the natural gas storage. The table below presents the developments in storage during November and early December over the past five years. As you can see, storage has declined this year by the largest amount since 2008. If storage continues to fall by a sharper rate than in previous years, this could put pressure on natural gas prices.
What Kind of Winter Is Ahead?
Last week, U.S. temperatures (on a national level) were 0.4 degrees cooler than the 30-year normal temperature and 5.9 degrees cooler than the same week last year. It's still unclear how cold this winter will be, which could partly explain in the unclear trend in natural gas prices. Current expectations are of warmer weather in the weeks to follow. Nonetheless, winter storm Caesar could pull down temperatures in the days to come in the Northeast region.
What's Ahead for Natural Gas?
Natural gas storage declined last week and could continue to pull down -- and perhaps even close the gap -- from the average five-year storage. This could eventually contribute to a rally of natural gas prices in the weeks to follow. Nonetheless, the uncertainty around the type of winter coming and how cold it will be in January/February is keeping natural gas from rising and settling around the $3.80-$3.90 range.
The expected mild weather in the weeks to follow could further lower the demand for natural gas, which could ease the price pressures from the demand side. Moreover, natural gas production remains stable and thus lowers the price pressures from the supply side. Therefore, the price of natural gas might continue to pull down in the near future, but once the uncertainty around the winter dissipates, the prices of natural gas might change direction and rise (assuming this winter will be colder than normal).
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.