Is The Natural Gas Rally Over?

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 |  Includes: UNG
by: Lior Cohen

The price of natural gas (short term delivery) continued to rise last week. Based on the latest EIA report, last week's withdrawal from storage was high for the season. Is natural gas' rally over? Let's examine the recent changes related to the natural gas market.

During last week, the future price of Henry Hub (short term delivery) sharply increased by 2.5%. Moreover, United States Natural Gas (NYSEARCA:UNG) also rallied by 1.3%. As of last week, the Henry Hub future prices were nearly $1.83 per million BTUs higher than the price for the same week in 2012. The rally in the price of natural gas may have also helped pressure up shares of major natural gas and oil producers such Chesapeake Energy (NYSE:CHK): During the previous week, Chesapeake's stock rose by 0.3%. If natural gas will continue to trade up it could raise the expected revenues of Chesapeake and thus positively affect the company's shares.

The chart below shows the changes in the price of natural gas during February and March. As seen, natural gas prices have risen in the past several weeks.

Click to enlarge
(Click to enlarge)

Storage

According to the latest EIA weekly update, the underground natural gas storage contracted by 95 Bcf to 1,781 Bcf. In comparison, the storage increased by 57 Bcf during the same week in 2012 and by 10 Bcf for the average five years. The current storage for all lower 48 states is 26.5%, below last year's storage and only 3.5% above the 5-year average. The gap between the current storage and the 5-year average shrank in recent weeks - the gap was 17.7% back in February. The table below presents the developments in storage from November to March (for twenty one weeks) in the past five years. As presented, the average extraction in 2012/3 is slightly higher (in absolute numbers) than the average withdrawal in 2011/2 and in 2008/2009. Moreover, the average withdrawal is only slightly lower than the average withdrawals between 2010 and 2012.

Demand

From the demand standpoint, during last week, the average U.S NG consumption increased again by 7% and was 31.1% higher than the same week in 2012. The power sector led the charge with a 12.1% gain (week over week) but was 12.2% lower than last year. Moreover, the residential/commercial sector's demand rose by 8.2% (week over week) and was 100.9% higher than last year's consumption. Finally, the industrial sector's demand inched up by nearly 0.4% (W-o-W). As a result, the total demand for NG increased by 7% compared to last week's. Finally, the total demand was 31.3% higher than the demand during the same week last year. Based on the above, the demand for natural gas grew during last week compared to the demand for natural gas a week earlier and compared to last year's.

Supply

From the Supply standpoint, the gross natural gas production inched down by 0.3% during last week; it was 0.6% above the production in 2012. Conversely, imports from Canada rose last week by 4.1% (week-over-week); the imports were also 13.3% above the same week in 2012. The total U.S natural gas supply inched up by 0.13% compared to last week.

According to the recent weekly report by Baker Hughes, the natural gas rotary rig count sharply declined by 29 and reached 389 rigs. The rig count was also 41% lower than the number of rigs recorded on the same week in 2012.

So during last week, the natural gas supply remained virtually unchanged while the demand sharply increased compared to the previous week and compared to the same week in 2012. In other words, the natural gas market tightened compared to the same week in 2012 and compared to the previous week.

Is the Winter Over?

During last week, the U.S temperatures (on a national level) were 3.1 degrees cooler than the 30-year normal temperature and 16.9 degrees cooler than the same week last year. Below average temperatures are expected in the Northeast in the next couple of days. That being said, in the next two weeks the temperatures across the U.S including the East Coast and Midwest are expected to rise and reach above normal temperatures. The precipitation is expected to be above normal mainly in the Midwest and North. On a national level, however, the heating degrees for this week are projected to remain higher than normal and much higher than the heating degrees recorded during the same week a year back. Therefore, the expected rise in temperatures in the U.S doesn't coincide with expected changes in the demand for natural gas for heating purposes. But if the temperatures will start to rise, we might see a drop in demand for natural gas, which could curb the recent rally of natural gas prices and might even change their course. Finally, according on the updated three month outlook, the temperatures in the Northeast and Midwest are still expected to be well above normal.

What's Next for Natural Gas?

The demand for natural gas continued to grow last week. Moreover, the withdrawal from storage was high compared to the 5-year average. Conversely, the temperatures in many parts in the U.S are expected to rise and reach above normal temperatures in the coming weeks. This might bring down the demand for natural gas for heating purposes. Nonetheless, the demand for natural gas in the power sector is likely to remain robust. This sector is likely to curb the decline in the prices of natural gas. From the supply side, natural gas production remained virtually unchanged. Based on the recent developments in supply and demand, the natural gas market slightly tightened compared to the previous week. But the expected to rise in temperatures might bring the price of natural gas down or at least curb its recent rally. If these weather projections will come through, I guess the price of natural gas is likely to slowly decline below the $4 mark.

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. 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.