The price of natural gas (short term delivery) resumed its downward trend during last week. The recent fall in prices was despite the sharp fall in natural gas storage according to the recent EIA report. Following the recent extraction, the gap between the depletion pace in recent weeks and the five year average has narrowed. Is the natural gas market cooling down? Let's examine the recent changes in the natural gas market.
During the previous week, the future price of Henry Hub (short term delivery) fell by 3.42%. Moreover, United States Natural Gas (UNG) also decreased by 2.9%. As of last week, the Henry Hub future prices were nearly $1.04 per million BTUs above the price for the same week in 2012. The recent drop in the price of natural gas may have curbed the rally of major natural gas and oil producers' stocks such Chevron Corporation (CVX): During the previous week, shares of Chevron rose by 0.8%. If natural gas will further decline it could lower the expected revenues of Chevron and thus adversely affect the stock price.
The chart below presents the developments in the price of natural gas between November and January. As seen, natural gas prices changed direction and decreased in recent days.
According to the latest EIA weekly report, the underground natural gas storage sharply declined by 172 Bcf and reached 2,996 Bcf. This recent extraction was the second largest for the season so far. In comparison, the storage declined by 192 Bcf during the same week last year, and by 157 Bcf for the average five years. The current storage for all lower 48 states is 12% above the 5-year average but 5% below last year's storage. The table below shows the developments in storage from November to January (for ten weeks) in the past five years. As seen, the average extraction in 2012/3 is higher than the average extraction in 2011/2 but remains below the extraction in the previous years.
From the demand standpoint, during the previous week, the average U.S NG consumption rose by 9.1% and was also 3.7% higher than the same week last year. The residential/commercial sector led the rise with a 17% gain (week over week) and was also 8.2% higher than last year. Conversely, the power sector's NG demand decreased by 2.5% (week over week). Finally, the industrial sector's demand increased by nearly 4.4% (W-o-W). As a result, the total demand for NG spiked by 9.1% compared to last week. Finally, the total demand was 4.1% above the demand during the same week last year. This means, the demand for natural gas rose last week and at the same time remained relatively high to last year.
From the Supply standpoint, the gross natural gas production inched up by 0.04% during last week; it was 1% below the production in 2012. Moreover, imports from Canada spiked by 26.5% (week-over-week); the imports were also 8.5% higher than the same week last year. The total U.S natural gas supply increased on a weekly scale by 1.93%. Therefore, the NG supply expanded last week. According to a recent report, the natural gas rotary rig count changed direction and rose by 5 and reached 434 rigs, according to Baker Hughes. The rig count is nearly 44% lower than the same week in 2012.
So during last week, the natural gas supply and demand expanded. The demand rose by a sharper rate than the supply. For the supply, most of the growth came from the imports. The production remained nearly unchanged. Moreover, compared to last year the demand is higher while the supply is slightly lower. Thus, the natural gas market has slightly tightened compared to last week tightened and compared to the same time last year.
Winter Storm Will Lead to a Rise in Demand for Natural Gas
During last week, the U.S temperatures (on a national level) were 4.9 degrees warmer than the 30-year normal temperature and 1.6 degrees warmer than the same week in 2012. In the days to follow, the temperatures are expected to plunge in the Northeast on account of Winter Storm Luna. Moreover, the temperatures are expected to remain lower than normal in the East Coast and especially in the Northeast in the following weeks; the precipitation is also projected to be above normal in the Northeast. On the other hand, on a national level the heating degrees this week are expected to be lower than normal but higher than last year. This means even though the low temperatures will lead to an increase in the consumption for natural gas compared to last year but not necessarily than the previous year.
Based on the current three month outlook, the temperatures in the Northeast will remain above normal.
So what's up ahead for natural gas?
Natural gas storage fell last week by a faster than normal rate. The storage levels are higher than normal but lower than last year's storage level. Temperatures are expected to drop in the coming weeks, which could lead to sharp rise in the demand for natural gas for heating purposes. Moreover, the natural gas market has tightened last week: Production remained unchanged while the demand increased. This could mean the price of natural gas will change course and rise in the near future but will remain very low compared to the five-year average. My guess, based on the above, is that natural gas prices will remain around the $3.3 to $3.5 price range and won't reach the low prices recorded at the beginning of 2012.
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.