The price of natural gas (short-term delivery) traded down last week. According to the latest EIA report, the withdrawal from storage was below the five-year average withdrawal. This news may have contributed to the decline in natural gas prices by the end of last week. Following the recent developments, will natural gas continue to trade down?
During last week, the future price of Henry Hub (short-term delivery) fell by 3.73%. Moreover, United States Natural Gas (NYSEARCA:UNG) also declined by 3.2%. As of last week, the Henry Hub future prices were nearly $0.82 per million BTUs above the price for the same week in 2012. The recent sharp fall in the price of natural gas may have also partly contributed to the moderate downward trend of major natural gas and oil producers' stocks such Chevron Corporation (NYSE:CVX): During last week, shares of Chevron declined by 0.6%. If natural gas will continue to decline, it could lower the expected revenues of Chevron and thus adversely affect the company's stock.
The chart below presents the changes in the price of natural gas during recent weeks. As seen, natural gas prices moved in an unclear trend.
Based on the recent EIA weekly update, the underground natural gas storage fell by 157 Bcf to 2,527 Bcf. In comparison, the storage declined by 127 Bcf during the same week last year and by 166 Bcf for the average five years. The current storage for all lower 48 states is 16% above the 5-year average but 9.7% below last year's storage. The table below presents the developments in storage from November to February (for fifteen weeks) in the past five years. As seen, the average extraction in 2012/3 is still much higher than the total withdrawal in 2011/2 but remains below the withdrawals in the preceding years. The average extraction this season is getting closer to the average recorded in 2008/2009. The average price is also lower than the prices in 2008-2011 but higher than last year.
From the demand side, during the previous week, the average U.S NG consumption fell by 8.4% and was 10.9% lower than the same week last year. The residential/commercial sector led the fall with a 12.7% drop (week over week) and was also 6% lower than last year. Moreover, the power sector's NG demand also decreased by 3.4% (week over week). Finally, the industrial sector's demand declined by nearly 3.1% (W-o-W). As a result, the total demand for NG decreased by 8.3% compared to last week. Finally, the total demand was also 10.4% below the demand during the same week in 2012. This means, the demand for natural gas contracted last week and was relatively low to last year.
From the Supply side, the gross natural gas production rose by 0.6% during last week; it was also 1.9% above the production in 2012. Alternatively, imports from Canada declined by 3% (week-over-week); the imports were also 13.2% lower than the same week in 2012. The total U.S natural gas supply slightly expanded on a weekly scale by 0.4%. Therefore, the NG supply slightly grew last week. According to a recent weekly update, the natural gas rotary rig count slightly fell by 4 and reached 421 rigs, according to Baker Hughes. The rig count is around 412% below the number of rigs recorded on the same week in 2012. Moreover, according to the latest EIA report, natural gas production is expected to remain flat in the upcoming two years.
So during last week, the natural gas supply slightly expanded while the demand contracted. Moreover, compared to last year, the demand was lower while the supply slightly higher. Thus, the natural gas market has loosened compared to the previous week and compared to the same time last year.
Is The Weather Heating Up?
During last week, the U.S temperatures (on a national level) were 0.1 degrees cooler than the 30-year normal temperature and 8.3 degrees cooler than the same week in 2012. Additional storms are expected to arrive to the Northeast and the Midwest. Nonetheless, temperatures are expected to rebound in the Northeast in the following days but to remain below average in the Midwest and West. In the next two weeks, the temperatures are expected to be higher than normal in the Northeast but lower than normal in the West Coast and Midwest; the precipitation is projected to be above normal in most regions especially in the Southeast. On a national level, the heating degrees for this week are expected to remain lower than normal and lower than the heating degrees during same week last year. This means even though in parts of the U.S, the temperatures will remain lower than normal, they won't lead to a rise in the consumption for natural gas for heating purposes. In other words, the consumption is likely to remain lower than normal. In such a case, natural gas prices are likely to further decline. Based on the latest three month outlook, the temperatures in the Northeast and Midwest are still expected to be higher than normal.
So what's next for natural gas?
The natural gas extraction from storage during this winter, so far, remained lower than the five-year average. The natural gas demand changed course last week mainly in the Northeast. Moreover, the total demand, based on heating degrees, is likely to remain higher than normal. At the same time, the natural gas storage remains higher than the five-year average. The supply slightly expanded last week but overall is expected to remain stable. This could suggest the price of natural gas will remain in the $3 to $3.2 price range. Nonetheless, I still think the price of natural gas won't fall to the $2 mark as it did in 2012.
For further reading see "Will Natural Gas Fall to $2?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.