Will Natural Gas Reach $5?

Includes: CHK, UNG
by: Lior Cohen

The price of natural gas (short-term delivery) sharply rose again during most of last week. Will the price of natural gas continue to rally? Let's examine the recent developments related to the natural gas market.

During last week, the future price of Henry Hub (short-term delivery) increased by 4.4%. Moreover, United States Natural Gas (NYSEARCA:UNG) rose by 3.9%. As of last week, the Henry Hub future price was nearly $2.20 per million BTUs higher than the price during the same week in 2012. The recovery of natural gas may have curbed the decline of shares of major natural gas and oil producers such as Chesapeake Energy Corporation (NYSE:CHK): During last week, Chesapeake's stock declined by 5.5%. If natural gas will continue to trade up, it could raise the expected revenues of Chesapeake and thus positively affect the company's stock.

The chart below shows the changes in the price of natural gas between February and April. As seen, natural gas prices have had an upward trend in recent weeks.


Based on the latest EIA weekly report, the underground natural gas storage rose (for the first time this season) by 31 Bcf to reach 1,704 Bcf. In comparison, the storage rose by 25 Bcf during the same week in 2012 and by 39 Bcf according to the five-years average. The current storage for all lower 48 states is 31.80% below last year's storage and 4.20% below the 5-years average. The table below presents the developments in storage from November to April (for twenty four weeks) in the past five years. As seen, the average extraction in 2012/3 is higher (in absolute numbers) than the average withdrawal in previous years. The high extraction may have fueled the rally of natural gas in recent weeks.


From the demand standpoint, during last week, the average U.S NG consumption changed course and rose by 1.6% (week over week). The consumption was still 3.1% below the natural gas consumption recorded during the same week in 2012. The power sector led the rise with a 4.5% gain (week over week) but was 22% lower than last year. Moreover, the residential/commercial sector's demand also rose by 0.8% (week over week) and was 15.2% higher than last year's consumption. Finally, the industrial sector's demand edged down by nearly 0.1% (W-o-W). As a result, the total demand for NG increased by 1.4% compared to last week's. But the total demand was still 2.2% lower than the demand during the same week last year. Based on the above, the demand for natural gas rose during last week compared to the demand for natural gas a week earlier but remained lower than last year's.


From the Supply standpoint, the gross natural gas production slipped by 0.2% during last week; it was still 1.7% above the production in 2012. Conversely, imports from Canada rose last week by 10% (week-over-week); the imports were 0.9% below the levels during the same week in 2012. The total U.S natural gas supply slightly increased by 0.5% compared to last week.

According to the recent weekly report by Baker Hughes, the natural gas rotary rig count rose by 2 and reached 379 rigs. The rig count is still 40% below the number of rigs recorded during the same week in 2012.

So during last week, the natural gas supply and demand rose. Conversely, compared to the same week last year, the demand for natural gas declined while the supply increased. Thus, the natural gas market tightened compared to last week but loosened compared to the same time last year.

Is the Weather Heating Up Soon?

During last week, the U.S temperatures (on a national level) were 3 degrees warmer than the 30-year normal temperature and 1.1 degrees warmer than the same week last year. In the next couple of days, the temperatures are projected to vary from below average to slightly above average in the Northeast, Midwest and South. But in the coming weeks, the temperatures in most parts of the U.S including Northeast and Midwest (except for Florida) are expected to be higher than normal. The precipitation is projected to remain above normal mainly in the East Coast. On a national level, the heating degrees for this week are projected to be lower than normal. The expected rise in temperatures in the U.S might curb the demand for natural gas for heating purposes. Therefore, if the temperatures will climb, we might see a drop in demand for natural gas, which could pressure down natural gas prices.

What's next for Natural Gas?

The recent spike in the price of natural gas may have partly been driven by a short squeeze. From the supply and demand standpoint: the rise in consumption in the power sector and the little movement in the supply may have also pulled up the price of natural gas. But the recent rally in the price of natural gas may eventually steer away electric companies from using natural gas. Moreover, the expected rise in temperatures is likely to pull down the demand for natural gas for heating purposes. If the weather forecasts will come through, and if the short sellers won't reach another short squeeze situation, I guess the price of natural gas will start to come down.

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.