The price of natural gas (short term delivery) continued to rise during last week. Based on the recent EIA report, last week's withdrawal from storage was much higher than the five year average withdrawal. This news may have contributed to the rise in natural gas prices. Will natural gas continue to rally? Let's examine the recent developments in the natural gas markets.
During last week, the future price of Henry Hub (short term delivery) increased by 5%. Moreover, United States Natural Gas (UNG) also rose by 3.9%. As of last week, the Henry Hub future prices were nearly $0.65 per million BTUs above the rate for the same week in 2012. The recent rise in the rate of natural gas may have also partly contributed to the moderate rise of major natural gas and oil producers' stocks such Chevron Corporation (CVX): During the previous week, shares of Chevron increased by 0.8%. If natural gas will continue to increase it could raise the expected revenues of Chevron and thus positively affect the company's stock.
The chart below presents the developments in the price of natural gas during recent weeks. As seen, natural gas prices moved in an unclear trend in the past couple of months.
Based on the recent EIA weekly update, the underground natural gas storage fell by 171 Bcf to 2,229 Bcf. In comparison, the storage declined by 82 Bcf during the same week last year and by 107 Bcf for the average five years. The current storage for all lower 48 states is 16% above the 5-year average but 12.1% below last year's storage. The table below presents the developments in storage from November to February (for seventeenth weeks) in the past five years. As seen, the average extraction in 2012/3 remains higher (in absolute numbers) than the average withdrawal in 2011/2; it is also slightly higher than average recorded in 2008/2009. On the other hand, the average withdrawal is still below the withdrawals in the preceding years. The average price is also lower than the prices in 2008-2011 but higher than last year.
From the demand standpoint, during last week, the average U.S NG consumption fell by 2.4% but was 12.3% higher than the same week last year. The residential/commercial sector led the fall with a 4.7% drop (week over week) but was also 27.7% higher than last year. Conversely, the power sector's demand increased by 1.5% (week over week). Finally, the industrial sector's demand fell by nearly 0.8% (W-o-W). As a result, the total demand for NG decreased by 2.3% compared to last week. Finally, the total demand remained 12.6% above the demand during the parallel week in 2012. This means, the demand for natural gas contracted last week compared to the consumption a week earlier but remained higher than last year's.
From the Supply standpoint, the gross natural gas production slipped by 0.5% during last week; it was still 1.1% above the production in 2012. Moreover, imports from Canada remained virtually unchanged last week (week-over-week); the imports were 2.4% above the same week in 2012. The total U.S natural gas supply slightly declined by 0.6%.
Based on the recent weekly report, the natural gas rotary rig count fell by 8 and reached 420 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 the previous week, the natural gas supply and demand slightly declined. Nonetheless, the demand remained much higher than last year while the supply remained nearly unchanged compared to the same week in 2012. Thus, the natural gas market remained tight compared to the same time last year but slightly looser than last week.
The Weather Remains Cold
During last week, the U.S temperatures (on a national level) were 3.1 degrees cooler than the 30-year normal temperature and 6.3 degrees cooler than the same week in 2012. Moreover, the temperatures in the Northeast, Midwest and South are expected to remain below normal in the next few days. In the next couple of weeks, however, the temperatures are expected to be higher than normal in the Northeast but lower than normal in the Midwest, and the West Coast; the precipitation is projected to be above normal in East Coast. On a national level, the heating degrees for this week are expected to be slightly lower than normal but much higher than the heating degrees during same week in 2012. Therefore, despite the low temperatures in the U.S, the consumption for natural gas for heating purposes isn't expected to be higher than normal. In other words, the consumption is likely to be slightly lower than normal. In such a case, natural gas prices are likely to change course and dwindle. Finally, based on the recent three month outlook, the temperatures in the Northeast and Midwest are still expected to be higher normal.
So what's next for natural gas?
Natural gas storage remains higher than the five year average. The temperatures in the Midwest will remain low and thus will keep demand for natural gas in that area high. Conversely, the expected rise in temperatures in the Northeast may curb the growth in demand for natural gas for heating purposes in the coming weeks. Based on the changes in supply and demand during last week, the natural gas market loosened up compared to the previous week. The total extraction from storage during this season was still low compared to the five year average. Since there are only a few more weeks left for the extraction season, the possibility of a sharp rise in demand declines. These factors are likely to curb the recent rally of natural gas. My guess is that the price of natural gas will change course and fall to the $3.3-$3.4 price range.
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.