The price of natural gas (short term delivery) continued to decline during last week. The latest drop in prices was despite the higher than normal withdrawal from the natural gas storage according to the latest EIA report. Following the recent withdrawal, the amount of natural gas extracted from storage is still lower than the five year average but remains higher than last year. Will natural gas prices continue to fall? Let's examine the recent developments in the natural gas market.
During last week, the future price of Henry Hub (short term delivery) tumbled down by 4.15%. Moreover, United States Natural Gas (UNG) also plunged by 5%. As of last week, the Henry Hub future prices were nearly $0.97 per million BTUs above the price for the parallel week in 2012. The recent decline in the price of natural gas may have curbed the rally of major natural gas and oil producers' stocks such Chesapeake Energy Corporation (CHK): During the previous week, shares of Chesapeake increased by 5%. If natural gas will further tumble down 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 between December and February. As seen, natural gas prices sharply fell in recent days.
According to the recent EIA weekly update, the underground natural gas storage fell by 194 Bcf and reached 2,802 Bcf. This recent withdrawal was the second largest for the season so far. In comparison, the storage fell by 132 Bcf during the same week last year and by 179 Bcf for the average five years. The current storage for all lower 48 states is 12.2% above the 5-year average but 6.7% below last year's storage. The table below presents the changes in storage from November to January (for eleven weeks) in the past five years. As seen, the average extraction in 2012/3 is higher than the total withdrawal in 2011/2 but remains below the withdrawals in the preceding years.
From the demand side, during last week, the average U.S NG consumption fell by 10.1% but was 6.3% higher than the same week last year. The residential/commercial sector led the fall with a 11.6% drop (week over week) but was also 20.7% higher than last year. Moreover, the power sector's NG demand also decreased by 13.7% (week over week). Finally, the industrial sector's demand decreased by nearly 3% (W-o-W). As a result, the total demand for NG fell by 9.9% compared to last week. Finally, the total demand was 6.7% above the demand during the same week in 2012. This means, the demand for natural gas declined last week and at the same time remained relatively high to last year.
From the Supply side, the gross natural gas production increased by 1% during last week; it was 0.3% below the production in 2012. Conversely, imports from Canada fell by 9.9% (week-over-week); the imports were also 2.2% lower than the same week last year. The total U.S natural gas supply remained virtually unchanged on a weekly scale. Therefore, the NG supply remained stable last week. According to a recent report, the natural gas rotary rig count changed direction and fell by 6 and reached 428 rigs, according to Baker Hughes. The rig count is nearly 43% lower than the same week in 2012.
So during last week, the natural gas supply remained nearly unchanged while the demand contracted. The supply was unchanged because the rise in production was cancelled by the drop in imports. Moreover, compared to last year the demand is higher while the supply is slightly lower. Thus, the natural gas market has loosened compared to last week but tightened compared to the same time last year.
Is the Winter Over?
During last week, the U.S temperatures (on a national level) were 0.1 degrees cooler than the 30-year normal temperature and 2.7 degrees cooler than the same week in 2012. Nonetheless, in the days to follow, the temperatures are expected to remain low in the Midwest and Northeast with snowfall in parts of the Northeast. Conversely, the temperatures are expected to pick up and be higher than normal in the Northeast but to remain lower than normal in the Midwest and parts of the West; the precipitation is projected to be above normal in the Northeast and Midwest. On the other hand, on a national level the heating degrees for this week are expected to remain lower than normal but slightly higher than the same week last year. This means even though in parts of the U.S the temperatures are still low, this condition won't lead to higher than normal consumption for natural gas. The consumption is likely to remain higher than last year.
Based on the current three month outlook, the temperatures in the Northeast and Midwest are expected to be higher normal.
So what's next for natural gas?
The natural gas storage dwindled last week at a slightly faster than normal pace. The total depletion rate for this season is lower than the five year average but higher than last year. Furthermore, the storage levels remain higher than normal but lower than last year's storage level. The low temperatures in certain parts of the U.S (Midwest) aren't likely to lead to a sharp increase in the demand for natural gas for heating purposes. Moreover, the natural gas market has loosened last week: The production remained stable while the demand fell. This could mean the price of natural gas will be pressured down in the near future but will remain higher than last year's rate. My guess, based on the above, is that natural gas prices will remain around the $3.2 to $3.4 price range. The price won't reach the rates recorded last year but will continue to be lower than the five year average.
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.