The price of natural gas (short term delivery) tumbled down during last week. According to the recent EIA report, last week's rise in natural gas storage was lower than the five year average. Will the price of natural gas keep falling? Let's examine the recent developments related to the natural gas market.
During last week, the future price of Henry Hub (short term delivery) declined by 2.7%. Moreover, United States Natural Gas (NYSEARCA:UNG) also fell by 4.2%. As of last week, the Henry Hub future price was nearly $2.24 per million BTUs higher than the price during the same week last year. The recent drop of natural gas may have slightly contributed to the decline of shares of major natural gas and oil producers such Chesapeake Energy Corporation (NYSE:CHK): During last week, Chesapeake's stock slipped by 0.4%. If natural gas continues to fall, it could lower the expected revenues of Chesapeake and thus adversely affect the company's stock.
The chart below shows the developments in the price of natural gas between February and May. As seen, natural gas prices have tumbled down last week.
According to the latest EIA weekly report, the underground natural gas storage rose (for the third time this season) by 43 Bcf to reach 1,777 Bcf. In comparison, the storage increased by 28 Bcf during the same week in 2012 and by 70 Bcf according to the five years average. The current storage for all lower 48 states remained 30.9% below last year's storage and 6.2% below the 5-years average. The table below presents the developments in storage during April (for four weeks) in the past several years. As seen, the average buildup in 2013 was second lowest (the lowest was in 2011) compared to the buildup in preceding years. The low buildup of storage may curb the downward trend of natural gas from last week.
From the demand standpoint, during last week, the average U.S. NG consumption sharply declined by 9.3% (week over week). The consumption was also 11.3% below the natural gas consumption recorded during the same week in 2012. The residential/commercial sector led the fall with a 24.3% drop (week over week); it was also 5.2% lower than last year. Conversely, the power sector's demand rose by 2.5% (week over week) but was 24.8% lower than last year's consumption. Finally, the industrial sector's demand slightly declined by nearly 1.4% (w-o-w). As a result, the total demand for NG decreased by 8.8% compared to last week's. The total demand was also 10.7% lower than the demand during the same week last year. Based on the above, the demand for natural gas tumbled during last week compared to the demand for natural gas a week earlier, and also remained lower than last year's.
From the Supply standpoint, the gross natural gas production slipped by 0.3% during last week; it was still 2.1% above the production in 2012. Moreover, imports from Canada fell last week by 5% (week-over-week); the imports were 4.3% below the levels during the same week in 2012. The total U.S. natural gas supply slightly declined by 0.6% compared to last week.
Based on the recent weekly report by Baker Hughes, the natural gas rotary rig count fell by 12 and reached 354 rigs. The rig count is 42% below the number of rigs recorded during the same week in 2012.
So the natural gas supply slightly declined while demand sharply fell compared to the previous week. Moreover, compared to the same week last year, the demand also tumbled while the supply rose. Therefore, the natural gas market loosened compared to last week and compared to the same time last year.
The Weather Keeps Heating Up
During last week, the U.S. temperatures (on a national level) were 4.6 degrees cooler than the 30-year normal temperature and 5.7 degrees cooler than the same week last year. The temperatures are expected to vary from below average to above average temperature in the Northeast, and from average to above average in the Midwest in the next several days. In the next two weeks, the temperatures in Northeast and West are projected to reach above normal temperatures, but the temperatures will be below normal in parts of the Gulf Coast region. The precipitation is expected to remain above normal mainly in the East Coast. On a national level, the heating degrees for this week are projected to be below normal and below the heating degrees recorded in the same week last year. The expected rise in temperatures in the U.S. might further pull down the demand for natural gas for heating purposes. Therefore, if the temperatures will continue to rise, we might see a further drop in demand for natural gas, which could drag down natural gas prices.
What's Next for Natural Gas?
From the supply and demand sides: the sharp fall in consumption in the residential/commercial sector and the moderate decline in the supply may have contributed to the decrease in the price of natural gas. Moreover, the ongoing projected rise in temperatures is likely to further pull down the demand for natural gas for heating purposes. Conversely, the demand in the power sector is likely to rise, which will curb the drop in the total consumption of natural gas. If the weather forecasts come through, and if the demand for natural gas in the residential/commercial continues to dwindle, I guess the price of natural gas will continue to fall.
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.