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The price of natural gas (short term delivery) fell during last week. Based on the latest EIA report, last week's buildup in natural gas storage was higher than the five year average. Will the price of natural gas continue to decline? Let's analyze the latest developments related to the natural gas market.

During the previous week, the future price of Henry Hub (short term delivery) declined by 3.24%. Moreover, United States Natural Gas (NYSEARCA:UNG) also decreased by 3.6%. As of last week, the Henry Hub future price was nearly $1.97 per million BTUs higher than the price during the same week in 2012. The recent fall of natural gas may have slightly contributed to the decline of shares of major natural gas and oil producers such Chevron Corporation (NYSE:CVX). During the previous week, Chevron's stock declined by 0.2%. If natural gas keeps falling, it could lower the expected revenues of Chevron and thus adversely affect the company's stock price.

The chart below presents the changes in the price of natural gas between February and May. As seen, natural gas prices have fallen in recent weeks.

(click to enlarge)

Storage

Based on the recent EIA weekly update, the underground natural gas storage increased (for the fourth time this season) by 88 Bcf to reach 1,865 Bcf. In comparison, the storage rose by 30 Bcf during the same week in 2012 and by 69 Bcf, according to the five years average. The current storage for all lower 48 states remained 28.3% below last year's storage and 5% below the 5-years average. The table below shows the developments in storage during April (for five weeks) in the past several years. As seen, the average buildup in 2013 was the highest of the past three years. The rise in the pace in storage buildup may keep pulling down the price of natural gas.

Demand

From the demand side, during the previous week, the average U.S. NG consumption fell again by 3.2% (week over week). The consumption was also 8.5% below the natural gas consumption recorded during the same week in 2012. The power sector led the way with a 7.2% fall (week over week); it was also 34.7% lower than last year. Moreover, the residential/commercial sector's demand also fell by 2.1% (week over week), but was 24.5% higher than last year's consumption. Finally, the industrial sector's demand slipped by nearly 0.3% (w-o-w). As a result, the total demand for NG decreased by 2.7% compared to last week's. The total demand was also 7.6% lower than the demand during the same week last year.

Supply

From the Supply side, the gross natural gas production declined by 0.5% during last week; it remained 2.4% above the production in 2012. Conversely, imports from Canada rose last week by 1.9% (week-over-week); the imports were 1.1% above the levels during the same week in 2012. The total U.S natural gas supply slightly fell by 0.3% compared to last week.

According to the latest weekly report by Baker Hughes, the natural gas rotary rig count declined by 4 and reached 350 rigs. The rig count is 41% below the number of rigs recorded during the same week in 2012.

So the natural gas supply declined slightly while demand fell sharply compared to last week. Moreover, compared to the same week last year, the demand plummeted while the supply increased. Therefore, the natural gas market loosened compared to last week and compared to the same time last year.

The Weather Continues to Heat Up

During last week, the U.S. temperatures (on a national level) were 2.1 degrees warmer than the 30-year normal temperature and 1.7 degrees warmer than the same week last year. The temperatures are projected to reach below average temperature in the Northeast and Midwest in the coming days. In the next couple of weeks, the temperatures in the Northeast and West are expected to reach above normal temperatures, but the temperatures will fall to below normal in parts of the Gulf Coast region. The precipitation is expected to reach above normal in the East Coast. On a national level, the heating degrees for this week are expected to be below normal and below the heating degrees recorded in the same week in 2012. The expected increase in temperatures in the U.S., mainly in the Northeast, might further drag down the demand for natural gas for heating purposes. Therefore, if the temperatures will keep rising, 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 sides: the decline in consumption in the power and residential/commercial sectors and the moderate fall in the supply may have contributed to the decline in the price of natural gas. Moreover, the ongoing projected increase in temperatures is likely to further drag down the demand for natural gas for heating purposes. If the weather outlook comes through, and if the demand for natural gas in the power and residential/commercial continues to fall, I surmise the price of natural gas will keep falling.

For further reading, see "Will Natural Gas Remain Low in 2013?"

Source: Will The Natural Gas Market Keep Cooling Down?