NYMEX natural gas futures are based on physical delivery at the Henry Hub natural gas terminal in Southern Louisiana. The Henry Hub is the main inter-connect for a 16 intrastate and interstate natural gas pipeline system that delivers gas to the U.S. East Coast, the Gulf Coast, the Midwest, and, of course, the State of Louisiana. The EIA Weekly Natural Gas Storage report is broken down into three regions: the East, the Producing Region, and the West. The West Region is the smallest, and has a limited interconnectivity with the East Region and the Producing Region. Therefore, the West Region has only a minor impact on pricing at the Henry Hub. What primarily drives Henry Hub pricing is storage in the East Region, and more importantly, storage levels in the Producing Region, which is home to the Henry Hub.
The EIA report for the week ending February 15, 2013 showed the East Region had 1,108 Bcf still in storage. This is 10.1% above the 5 year average of 1,006 Bcf. Below normal temperatures in the East Region last week, and forecast below normal temperatures for the East Region next week should allow the East Region to get much closer to the 5 year storage average by the end of the first week of March. The Producing Region supplies some of the natural gas used in the Midwest and the Northeast. Below normal temperatures last week increased demand for Producing Region gas in those markets. While demand in the Midwest and the Northeast part of the country is a factor for Producing Region withdrawals from storage, the biggest factor is demand in the markets supplied almost exclusively by the Producing Region. The Producing Region consists of Texas, Louisiana, Mississippi, Alabama, Arkansas, Oklahoma, Kansas, and New Mexico.
The EIA report for the week ending February 15, 2013 showed the Producing Region had 925 Bcf in storage. This is 25.5% above the 5 year average of 737 Bcf. To have larger than normal withdrawals from storage in the Producing Region requires colder weather in the Producing Region states. Additionally, according to the EIA, the Southeast also receives a significant amount of its natural gas from the Producing Region:
In fact, according to the EIA, there are no natural gas storage facilities in Florida, Georgia, North Carolina, and South Carolina. These states get the bulk of their natural gas from the Producing Region during periods of peak demand. Last week, temperatures dipped below freezing in parts of Florida, and temperatures are forecast to dip below freezing in parts of Florida again this weekend. The weather is setting the Producing Region up to have above average withdrawals from storage over the next three weekly natural gas reporting periods. The EIA 5 year average for storage withdrawals in the Producing Region for the next three weeks ending with the March 8 storage report is only 53 Bcf combined for all three weeks. The EIA weekly natural gas report for the week ending February 15, 2013, showed the Producing Region had a storage withdrawal of 38 Bcf for just one week. The temperatures were not below freezing in Florida for that report. The biggest key to better NYMEX natural gas pricing at the Henry Hub is for the strong withdrawals predicted in the Producing Region in the next three reports to verify.
Investors looking to take advantage of a potential rally in natural gas prices should consider the United States Natural Gas Fund (UNG), because it has a direct correlation with the NYMEX futures prices based on physical delivery at the Henry Hub. Investors looking for longer-term investments in companies that produce and sell natural gas in the Henry Hub market should consider Chesapeake Energy (CHK), Petroquest (PQ), Crimson Exploration (CXPO), Goodrich Petroleum (GDP), EOG Resources (EOG), and Devon Energy (DVN).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.