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The price of natural gas (short-term delivery) continued its downward trend during most of last week. By the end of the week, however, the price of natural gas rallied. The recent rally may have been driven by the recent EIA storage report in which storage fell by faster than the five year average. Despite the drop in storage, the depletion rate in recent weeks remained slower than the five year average. Will natural gas prices resume their downward trend or will they rally on account of the recent change in storage extraction pace? Let's examine the latest developments in the natural gas market.

During the previous week, the future price of Henry Hub (short-term delivery) fell by 5.25%. Moreover, United States Natural Gas (NYSEARCA:UNG) also declined by 5.4%. As of last week, the Henry Hub future prices were nearly $0.34 per million BTUs above the price for the same week in 2011. The recent fall in the price of natural gas may have curbed the recent rally of major natural gas and oil producers' stocks such as Chesapeake Energy Corporation (CHK). During last week, shares of Chesapeake declined by 5.4%. If natural gas continues to fall, it could lower the expected revenues of Chesapeake and thus adversely affect the stock price.

The chart below shows the developments in the price of natural gas during recent months. As seen, natural gas prices resumed their downward trend in recent weeks.

(click to enlarge)

Storage

According to the latest EIA weekly report, the underground natural gas storage fell by 135 Bcf and reached 3,517 Bcf. In comparison, the storage declined by 76 Bcf during the same week last year, and by 120 Bcf for the average five years. The current storage for all lower 48 states is 12.4% above the 5-year average but only 0.7% above last year's storage. Moreover, the table below presents the changes in storage during November and December (for nine weeks) in the past five years. As seen, the average extraction in 2012 is slightly higher than the average extraction in 2011 but remains below the extraction in the preceding years. If the storage continues to fall at a slower pace than in the previous years, this could keep natural gas prices low.

So the gap between the recent year's storage levels and the current storage has narrowed. In other words, due to the recent extraction, the natural gas storage is declining at a faster rate than in previous years.

Due to the holidays, the EIA published only its storage report without the developments in the supply and demand.

According to the latest report, the natural gas rotary rig count rose again by 8 and reached 439 rigs, according to Baker Hughes. The rig count is still very low and is nearly 45% lower than the same week in 2011. Nonetheless, the recent slow growth in number of rigs could suggest a slowdown in the contraction in natural gas production.

Warming Up in Early January

Despite the sharp drop in U.S. temperatures in recent weeks, the temperatures are expected to elevate to above normal figures in the Midwest and Northeast but to remain lower than normal in the West in the coming days. Moreover, the temperatures are expected to remain higher than normal in the East Coast in the next couple of weeks, even though the precipitation is expected to be above normal in the East Coast and Midwest. Based on the current three month outlook, the temperatures in the Midwest will remain above normal, but it's still unclear how it will turn out in the East Coast.

So what's up ahead for natural gas?

Natural gas storage dropped last week by a faster than normal pace. This could suggest the demand for natural gas is rising at a faster rate than in recent weeks. Despite the latest drop in storage, natural gas prices might resume their downward trend in the days to follow as the temperatures will reach higher than normal weather. The current price is still higher than last year's; even though the natural gas storage is close to the level in 2011 and the extraction rate in recent weeks is only slightly faster. The recent storage report might contribute to the upward trend in natural gas prices in the first day of the week, but my guess, based on the above, is that natural gas prices will resume their downward trend as the week progresses.

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

Source: Is The Natural Gas Market Heating Up?