The price of natural gas (short term delivery) continued to rally during last week. According to the recent EIA report, last week's extraction from storage was higher than the five year average extraction. Will natural gas continue to rally? Let's examine the recent developments in the natural gas markets.
During the previous week, the future price of Henry Hub (short term delivery) rose by 5%. Moreover, United States Natural Gas (UNG) also increased by 4.9%. As of last week, the Henry Hub future prices were nearly $1.03 per million BTUs above the price for the same week in 2012. The recent rise in the price of natural gas may have also partly contributed to the moderate rise of major natural gas and oil producers' stocks such Chesapeake Energy Corporation (CHK). During last week, shares of Chevron (CVX) rose by 8.4%. If natural gas will continue to rally it could raise the expected revenues of Chesapeake and thus positively affect the company's stock.
The chart below shows the developments in the price of natural gas during recent months. As seen, natural gas prices have had an upward trend in recent weeks.
According the latest EIA weekly report, the underground natural gas storage declined by 146 Bcf to 2,083 Bcf. In comparison, the storage fell by 80 Bcf during the same week last year and by 100 Bcf for the average five years. The current storage for all lower 48 states is 14.8% above the 5-year average but 14.8% below last year's storage. The table below shows the developments in storage from November to March (for eighteenth weeks) in the past five years. As seen, the average extraction in 2012/3 was higher (in absolute numbers) than the average withdrawal in 2011/2 and in 2008/2009. On the other hand, the average withdrawal was well below the withdrawals in 2010-2012. So this winter didn't result is high extractions but the extraction rate wasn't so small.
From the demand side, during the previous week, the average U.S NG consumption declined by 3.8% but was 8.9% higher than the same week last year. The residential/commercial sector led the drop with a 5.6% tumble (week over week) but was also 23.1% higher than last year. Moreover, the power sector's demand decreased by 2.2% (week over week). Finally, the industrial sector's demand also slipped by nearly 1.8% (W-o-W). As a result, the total demand for NG decreased by 4% compared to last week. Finally, the total demand remained 9.1% above the demand during the parallel week in 2012. This means, the demand for natural gas contracted during last week compared to the demand for natural gas a week earlier but remained higher than last year's.
From the Supply side, the gross natural gas production inched down by 0.4% during last week; it was still 0.7% above the production in 2012. Moreover, imports from Canada sharply declined last week by 8.3% (week-over-week); the imports were 9.5% below than the same week in 2012. The total U.S natural gas supply fell by 0.9%.
Based on the recent weekly update, the natural gas rotary rig count declined again by 13 and reached 407 rigs, according to Baker Hughes. The rig count remained 39% below the number of rigs recorded on the same week in 2012.
So during last week, the natural gas supply and demand declined. Compared to the same week last year, however, the demand for natural gas remained high while the supply was slightly lower. Thus, the natural gas market remained tight compared to the same time last year but slightly looser than the previous week.
The Winter Is Still Here
During last week, the U.S temperatures (on a national level) were 1.4 degrees cooler than the 30-year normal temperature and 5.3 degrees cooler than the same week in 2012. Winter storm Triton is expected to slowly move East on Monday; the temperatures in the Northeast and the West are expected to be above normal while in Midwest and South are expected below normal in the next several days. In the next two weeks, however, the temperatures are projected to be lower than normal in the Northeast and the West Coast but higher than normal in the Midwest; the precipitation is projected to be above normal in North. On a national level, the heating degrees for this week are expected to be moderately lower than normal but much higher than the heating degrees during same week last year. Therefore, the low temperatures in the U.S are likely to pull up the demand for natural gas for heating purposes to near normal levels. In such a case, natural gas prices are likely to rally. Finally, based on the recent three month outlook, the temperatures in the Northeast and Midwest are still projected to be above normal.
So what's up ahead for natural gas?
The demand for natural gas remains robust even though the demand declined compared to the previous week. Moreover, the extraction rate from storage remains high so that the gap between the current storage and the five year average shrunk. The temperatures in the Northeast are expected to fall and thus will keep demand for natural gas in that area high. Moreover, the expected fall in temperatures in the Northeast may raise the growth in demand for natural gas for heating purposes in the coming weeks. Based on the recent developments in supply and demand, the natural gas market slightly loosened up compared to the previous week. In the next few weeks, the potential rise in demand for natural gas might push the price of natural gas up. But I guess this rally will be short lived and will soon change to a downward trend. Based on the recent developments, my guess is that the price of natural gas will moderately rise to the $3.7-$3.8 price range.
For further reading see "Is Chesapeake Regaining Our Confidence?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.