The price of natural gas (short term delivery) continued to rise during last week. Based on the latest EIA update, last week's withdrawal from storage was much higher than the five year average extraction. Will natural gas change course and fall anytime soon? Let's analyze the recent changes in the natural gas market.
During last week, the future price of Henry Hub (short term delivery) increased by 6.7%. Furthermore, United States Natural Gas (NYSEARCA:UNG) also rose by 5.8%. As of last week, the Henry Hub future prices were nearly $1.31 per million BTUs above the rate for the same week in 2012. The recent rally in the price of natural gas may have also contributed to the moderate gain of major natural gas and oil producers' stocks such Exxon Mobil Corporation (NYSE:XOM): During the previous week, shares of Exxon increased by 0.4%. If natural gas will continue to trade up it could raise the expected revenues of Exxon and thus positively affect shares of the company.
The chart below presents the changes in the price of natural gas during February and March. As seen, natural gas prices have spiked in recent weeks.
According the latest EIA weekly update, the underground natural gas storage fell again by 145 Bcf to 1,938 Bcf. In comparison, the storage declined by only 64 Bcf during the same week last year and by 66 Bcf for the average five years. The current storage for all lower 48 states is 11.4% above the 5-year average but 18.5% below last year's storage. The table below presents the developments in storage from November to March (for nineteenth weeks) in the last five years. As seen, the average extraction in 2012/3 is higher (in absolute numbers) than the average withdrawal in 2011/2 and in 2008/2009. Moreover, the average withdrawal is closing in on the average withdrawals between 2010 and 2012. The EIA projects that by the end of the heating season the storage will remain lower than last year but higher than the five year average.
From the demand standpoint, during last week, the average U.S. NG consumption tumbled down by 11.6% but was 11.3% higher than the same week last year. The residential/commercial sector led the fall with a 15.7% plunge (week over week) but was 38.4% higher than last year. Moreover, the power sector's demand also decreased by 15.9% (week over week). Finally, the industrial sector's demand also declined by nearly 2% (W-o-W). As a result, the total demand for NG fell by 11.3% compared to last week. Finally, the total demand was still 11.5% above the demand during the same week in 2012. This means, the demand for natural gas shrunk during last week compared to the demand for natural gas a week earlier but remained much higher than last year's.
From the Supply standpoint, the gross natural gas production inched up by 0.4% during the previous week; it was also 1.3% above the production in 2012. Moreover, imports from Canada slightly increased last week by 3.3% (week-over-week); the imports were 2% above the same week in 2012. The total U.S natural gas supply edged up by 0.5%.
Based on the latest weekly report, the natural gas rotary rig count rose by 24 and reached 431 rigs, according to Baker Hughes. The rig count remained 35% below the number of rigs recorded on the same week in 2012.
So during last week, the natural gas supply inched up while the demand declined. Compared to the same week last year, however, the demand for natural gas remained very high while the supply was only slightly higher. Thus, the natural gas market remained tight compared to the same time last year but slightly looser compared to last week.
The Winter Continues
During last week, the U.S temperatures (on a national level) were 6.4 degrees cooler than the 30-year normal temperature and 3.3 degrees cooler than the same week in 2012. Winter storm Ukko is expected to hit the Northeast on Monday; the temperatures in the Northeast and Midwest are expected to be below normal during the week. In the next two weeks the temperatures are expected to be lower than normal in the East Coast and Midwest but higher than normal in the West Coast; the precipitation is expected to be above normal in the North. On a national level, the heating degrees for this week are projected to be lower than normal but much higher than the heating degrees during parallel week in 2012. Therefore, the low temperatures in the U.S are likely to keep the demand for natural gas for heating purposes to near normal levels. In such a case, natural gas prices are likely to continue rising. Finally, according to the latest three month outlook, the temperatures in the Northeast and Midwest are still expected to be above normal.
So what's next for natural gas?
The demand for natural gas remains strong compared to last year even though the demand fell in recent weeks. Moreover, the withdrawal rate from storage continues to rise and is closing the gap with the five year average withdrawal rate. The temperatures in the Northeast and Midwest are expected to remain below normal and thus will keep demand for natural gas in those areas high. Nonetheless, the heating degrees are projected to remain below normal. The supply didn't change much and only slightly increased last week. Based on the recent changes in supply and demand, the natural gas market slightly loosened up compared to last week but remained tight compared to last year. In the next few weeks, the strong demand for natural gas might keep the price of natural gas rising. But I still guess this rally wouldn't last long. Based on the recent developments, my guess is that the price of natural gas will rise to around $4.
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.