The price of natural gas (short-term delivery) changed direction and rose last week. Based on the recent EIA report, the withdrawal from storage was close to the five-year average withdrawal. This news may have contributed to the rally in natural gas prices by the end of the previous week. Following the change in direction of the price of natural gas, will it continue to rally?
During the previous week, the future price of Henry Hub (short-term delivery) rallied by 4.38%. Moreover, United States Natural Gas (NYSEARCA:UNG) also increased by 3.3%. As of last week, the Henry Hub future prices were nearly $0.74 per million BTUs above the rate for the same week in 2012. The recent rally in the price of natural gas may have also partly contributed to the moderate rise of major natural gas and oil producers' stocks such Exxon Mobil Corporation (XOM). During last week, shares of Exxon rose by 1%. If natural gas will continue to increase, it could raise the expected revenues of Exxon and thus positively affect the company's stock.
The chart below shows the shifts in the price of natural gas during recent weeks. As seen, natural gas prices shifted in an unclear trend.
According to the latest EIA weekly report, the underground natural gas storage declined by 127 Bcf to 2,400 Bcf. In comparison, the storage fell by 166 Bcf during the same week last year and by 123 Bcf for the average five years. The current storage for all lower 48 states is 17% above the 5-year average but 9.2% below last year's storage. The table below shows the developments in storage from November to February (for sixteen weeks) in the past five years. As seen, the average extraction in 2012/3 is still higher (in absolute numbers) than the average withdrawal in 2011/2 but remains below the withdrawals in the preceding years. The average extraction this season is similar 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 last week, the average U.S. NG consumption rallied by 6.1% and was 9% higher than the same week last year. The residential/commercial sector led the rise with a 7.4% gain (week-over-week) and was also 22.8% higher than last year. Moreover, the power sector's NG demand also increased by 7.3% (week-over-week). Finally, the industrial sector's demand rose by nearly 2.2% (W-o-W). As a result, the total demand for NG increased by 6% compared to last week. Finally, the total demand was also 9.2% above the demand during the parallel week in 2012. This means, the demand for natural gas expanded last week and was relatively higher than last year's.
From the Supply side, the gross natural gas production edged down by 0.4% during last week; it was still 2% above the production in 2012. Alternatively, imports from Canada rose by 3.3% (week-over-week); the imports were also 1.5% above than the same week in 2012. The total U.S natural gas supply remained virtually unchanged.
According to a recent weekly update, the natural gas rotary rig count rose by 7 and reached 428 rigs, according to Baker Hughes. The rig count is around 39% below the number of rigs recorded on the same week in 2012.
So during last week, the natural gas supply remained nearly unchanged while the demand expanded. Furthermore, compared to last year, the demand was much higher while the supply slightly higher. Thus, the natural gas market has tightened compared to last week and compared to the same time last year.
Is the Weather Cooling Down again?
During last week, the U.S temperatures (on a national level) were 2.4 degrees warmer than the 30-year normal temperature and 3.3 degrees warmer than the same week in 2012. Winter storm Rocky will pull down the temperatures in the South, Midwest and Northeast in the coming days. In the next couple of weeks, the temperatures are expected to be lower-than-normal in the Midwest, and the East Coast; the precipitation is projected to be above normal in most regions. On a national level, the heating degrees for this week are expected to be slightly higher than normal and much higher than the heating degrees during same week last year. This means due to the expected drop in the U.S temperatures, the consumption for natural gas for heating purposes is expected to rise. In other words, the consumption is likely to be higher than normal. In such a case, natural gas prices are likely to change course and rally. Based on the recent three-month outlook, the temperatures in the Northeast and Midwest are still projected to remain higher than normal.
So what's up ahead for natural gas?
The expected decline in temperatures is likely to keep the demand for natural gas for heating purposes high in the coming weeks. This could also lead to additional growth in the price of natural gas. On the other hand, the natural gas storage remains higher than the five-year average. Moreover, the total extraction is still low for the season compared to the five-year average. These factors along with the stability of the supply are likely to keep natural gas from rising to the $4 mark. My guess is that the price of natural gas will keep rising in the near future but won't exceed the $3.6-$3.7 price range.
For further reading see "Will Exxon Continue To Trade Up?"
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.