The price of natural gas (short term delivery) changed direction and fell during most of last week. Based on the latest EIA report, last week's rise in natural gas storage was lower than the five year average. Will the price of natural gas decline further? Let's breakdown the recent changes related to the natural gas market.
During the previous week, the future price of Henry Hub (short term delivery) fell by 5.8%. Moreover, United States Natural Gas (NYSEARCA:UNG) also declined by 4.5%. As of last week, the Henry Hub future price was nearly $2.39 per million BTUs higher than the price during the same week last year. The recent fall of natural gas may have curbed the decline of shares of major natural gas and oil producers such Exxon Mobil Corporation (NYSE:XOM): During last week, Exxon's stock rose by 0.6%. If natural gas will continue to trade down, it could lower the expected revenues of Exxon and thus, adversely affect the company's stock.
The chart below presents the developments in the price of natural gas between February and April. As seen, natural gas prices have declined in the past several days.
Based on the recent EIA weekly update, the underground natural gas storage increased (for the second time this season) by 30 Bcf to reach 1,734 Bcf. In comparison, the storage rose by 36 Bcf during the same week in 2012 and by 44 Bcf according to the five years average. The current storage for all lower 48 states is still 31.80% below last year's storage and 5.10% below the 5 years average. The table below shows the developments in storage during April (for three weeks) in recent years. As seen, the average buildup in 2013 was second lowest (the lowest was in 2011) compared to the buildup in previous years. The low buildup of storage may have kept the rally of natural gas going in recent weeks.
From the demand side, during the previous week, the average U.S. NG consumption changed course and fell by 0.95% (week over week). The consumption was also 1.30% below the natural gas consumption recorded during the same week in 2012. The power sector led the fall with a 6.10% drop (week over week), and was 23.30% lower than last year. Conversely, the residential/commercial sector's demand rose by 1.9% (week over week) and was 22.7% higher than last year's consumption. Finally, the industrial sector's demand slightly rose by nearly 0.6% (W-o-W). As a result, the total demand for NG decreased by 1.1% compared to last week's. The total demand was also 1.2% lower than the demand during the same week last year. Based on the above, the demand for natural gas fell during last week compared to the demand for natural gas a week earlier and also remained lower than last year's.
From the Supply side, the gross natural gas production rose by 0.9% during last week; it was also 2.4% above the production in 2012. Moreover, imports from Canada inched up last week by 0.3% (week-over-week); the imports were 3.2% above the levels during the same week in 2012. The total U.S. natural gas supply increased by 0.8% compared to last week.
Based on the recent weekly update by Baker Hughes, the natural gas rotary rig count fell by 13 and reached 366 rigs. The rig count is still 40% below the number of rigs recorded during the same week in 2012.
So the natural gas supply rose while demand fell compared to the previous weeks and compared to the same week last year. Thus, the natural gas market loosened compared to last week and compared to the same time last year.
Will the Weather Continue to Heat Up?
During last week, the U.S. temperatures (on a national level) were 0.7 degrees warmer than the 30-year normal temperature, but 1.6 degrees cooler than the same week last year. The temperatures are expected to vary from slightly below average to above average temperatures in the Northeast, Midwest and South in the next several days. In the next couple of weeks, the temperatures in the Northeast and West are projected to rise, but they will remain below normal in the Midwest and South. The precipitation is expected to be above normal, mainly on the East Coast. On a national level, the heating degrees for this week are projected to be close to normal and close to the heating degrees recorded in the same week last year. The expected rise in temperatures in the U.S. might further curb the demand for natural gas for heating purposes. Therefore, if the temperatures will continue to climb, we might see a further decline in demand for natural gas, which could pull down natural gas prices.
What's Up Ahead for Natural Gas?
From the supply and demand standpoint: the drop in consumption in the power sector and the ongoing rise in the supply may have contributed to the drop in the price of natural gas. Moreover, the expected rise in temperatures is likely to further drag down the demand for natural gas for heating purposes. If the weather forecasts come through, and if the demand for natural gas in the power sector continues to fall, I guess the price of natural gas will continue to come down.
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.