The price of natural gas (short term delivery) slightly increased during last week. According to the recent EIA report, last week's withdrawal from storage was much higher than the five year average extraction. Will natural gas continue to trade up? Let's examine the latest developments in the natural gas market.
During the previous week, the future price of Henry Hub (short term delivery) rose again by 1.4%. Moreover, United States Natural Gas (UNG) also increased by 2%. As of last week, the Henry Hub future prices were nearly $1.63 per million BTUs above the price for the same week in 2012. The recent rise in the price of natural gas may have also contributed to the moderate gain of major natural gas and oil producers' stocks such Chevron (CVX): During last week, shares of Chevron increased by 1.3%. If natural gas will continue to rise it could raise the expected revenues of Chevron and thus positively affect the company's stock price.
The chart below presents the developments in the price of natural gas between February and March. As seen, natural gas prices have rallied in recent weeks.
Based on the recent EIA weekly report, the underground natural gas storage declined again by 62 Bcf to 1,876 Bcf. In comparison, the storage rose by 11 Bcf during the same week last year and fell by 20 Bcf for the average five years. The current storage for all lower 48 states is 21.5% below last year's storage but 9.5% above the 5-year average. The gap between the current storage and the 5-year average contracted in recent weeks - the gap reached 17.7% back in February. The table below shows the developments in storage from November to March (for twenty weeks) in the last five years. As seen, the average extraction in 2012/3 remains higher (in absolute numbers) than the average withdrawal in 2011/2 and in 2008/2009. Further, the average withdrawal is closing in on the average withdrawals between 2010 and 2012.
From the demand side, during the previous week, the average U.S NG consumption rose by 2.1% and was 26.2% higher than the same week last year. The residential/commercial sector led the charge with a 5.1% gain (week over week) and was 101% higher than last year. Alternatively, the power sector's demand decreased by 2.2% (week over week). Finally, the industrial sector's demand increased by nearly 1.1% (W-o-W). As a result, the total demand for NG rose by 2.5% compared to last week. Finally, the total demand was 26.4% above the demand during the same week in 2012. This means, the demand for natural gas expanded during last week compared to the demand for natural gas a week earlier and compared to last year's.
From the supply side, the gross natural gas production edged up again by 0.13% during last week; it was also 0.7% above the production in 2012. Conversely, imports from Canada slightly decreased last week by 1.1% (week-over-week); the imports were 13.5% above the same week in 2012. The total U.S natural gas supply remained unchanged.
Based on the recent weekly update by Baker Hughes, the natural gas rotary rig count fell by 13 and reached 418 rigs. The rig count remained 36% below the number of rigs recorded on the same week in 2012.
So during the previous week, the natural gas supply remained unchanged while the demand rose. Moreover, compared to the same week last year, the demand for natural gas spiked while the supply only slightly increased. Thus, the natural gas market tightened compared to the same time last year and compared to last week.
The Winter Persists
During the previous week, the U.S temperatures (on a national level) were 0.6 degrees warmer than the 30-year normal temperature but 6.1 degrees cooler than the same week in 2012. Winter storm Virgil will keep the snow in the coming days in the Northeast; the temperatures in the Northeast and Midwest in the 30s and 40s during the week. In the next couple of weeks the temperatures are projected to remain lower than normal in the East Coast and Midwest but higher than normal throughout the West Coast; the precipitation is expected to be above normal mainly in the Southeast. On a national level, the heating degrees for this week are expected to be higher than normal and much higher than the heating degrees recorded during the same week in 2012. Therefore, the ongoing low temperatures in the U.S are likely to the robust demand for natural gas for heating purposes. Based on these projections, natural gas prices are likely to remain at the current level or might event slightly rose. 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 the bottom line for natural gas?
The demand for natural gas remains robust compared to last week. Moreover, the withdrawal from storage was lower than the previous weeks, but the extraction was much higher than the 5-year average. The temperatures in the Northeast and Midwest are projected to remain below normal and thus will keep demand for natural gas in those areas robust. Furthermore, the heating degrees are projected to be above normal. The supply didn't change. Based on the recent developments in supply and demand, the natural gas market slightly tightened compared to last week and compared to last year. In the next couple of weeks, the strong demand for natural gas might keep natural gas trading up. I still guess this rally won't last a long period but in the near future the prices are likely to slowly rise to around the $4 to $4.1 price range.