The price of natural gas (short-term delivery) continued to rise during last week. The larger than anticipated drop in storage may have contributed to the spike in natural gas prices by the end of last week. Is the natural gas market heating up again? Let's examine the recent developments in the natural gas market.
During last week, the future price of Henry Hub (short-term delivery) spiked by 7.18%. Moreover, United States Natural Gas (UNG) also increased by 7.4%. As of last week, the Henry Hub future prices were still $0.37 per million BTUs above the price for the same week in 2012. The recent rise in the price of natural gas may have contributed to the recent rally of major natural gas and oil producers' stocks such as Chevron Corporation (CVX): During last week, shares of Chevron rose by 3.1%. If natural gas will continue to rise, it could raise the expected revenues of Chevron and thus positively affect the stock price.
The chart below presents the developments in the price of natural gas from November to January. As seen, natural gas prices changed direction and rallied in the past couple of weeks.
According to the latest EIA weekly report, the underground natural gas storage declined by 148 Bcf and reached 3,168 Bcf. This recent extraction was the second largest for the season so far. In comparison, the storage declined by 87 Bcf during the same week last year, and by 146 Bcf for the average five years. The current storage for all Lower 48 states is 11.1% above the 5-year average but 4.4% below last year's storage. Moreover, the table below shows the developments in storage from November to January (for eleven weeks) in the past five years. As seen, the average extraction in 2012/13 is higher than the average extraction in 2011/12 but remains below the extraction in the previous years.
From the demand side, during last week, the average U.S. NG consumption declined by 2.33% and was also 3.56% lower than the same week last year. The residential/commercial sector led the drop with a 5.4% decline (week-over-week) and was also 3.7% lower than last year. Conversely, the power sector's NG demand increased by 3.9% (week-over-week). Finally, the industrial sector's demand decreased by nearly 1.6% (W-o-W). As a result, the total demand for NG declined by 2.2% compared to the previous week. Finally, the total demand was also 3.2% below the demand during the same week last year. This means, the demand for natural gas contracted compared to the previous week and the same week last year.
From the Supply standpoint, the gross natural gas production slipped by 0.74% during last week; it was also 1.5% below the production in 2012. Moreover, imports from Canada also fell by 9.3% (week-over-week); the imports were also 7.1% lower than the same week last year. The total U.S. natural gas supply declined on a weekly scale by 1.5%. Therefore, the NG supply contracted last week. According to a recent report, the natural gas rotary rig count declined by 5 and reached 429 rigs, according to Baker Hughes. The rig count is still around 45% lower than the same week in 2012.
So during last week, the natural gas supply and demand contracted. Even compared to last year the supply and demand contracted. But the demand declined by a sharper rate than the supply, so the natural gas market has slightly loosened compared to last week and compared to the same time last year.
Temperatures Fall but Demand for Natural Gas isn't Rising
During last week, the U.S. temperatures (on a national level) were 4 degrees warmer than the 30-year normal temperature but 4.4 degrees cooler than the same week in 2012. In the days to come, the temperatures are expected to fall in the Midwest and Northeast. Moreover, the temperatures are expected to reach lower than normal temperatures in the East Coast in the next couple of weeks, and the precipitation is expected to be above normal in the North and Northeast. Conversely, on a national level, the heating degrees this week are expected to remain lower than normal and last year. This means even though the temperatures are expected to drop, the consumption for natural gas might remain lower than last year.
Based on the current three month outlook, the temperatures in the Northeast will remain above normal, but it's still unclear how it will turn out in the rest of the East Coast.
So what's up ahead for natural gas?
The natural gas storage fell last week by a similar pace compared to the five-year average but at a faster pace than last year. This could suggest the higher-than-normal temperatures from last year won't be the case this year. Moreover, the price of natural gas might not tumble precipitately as it did last year. The current storage, supply and demand is slightly lower than last year's. But at the same time, the storage level is higher than the five year average; the demand for natural gas isn't rising despite the cold weather. This could impede the progress of natural gas prices from rising to the $4 mark. The upcoming cold weather in the days to come is likely to pressure up the price of natural gas in the short term, but my guess is that natural gas will change course by February and resume its downward trend.
For further reading see "Will Natural Gas Remain Low in 2013?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.