Will The Natural Gas Rally Continue?

| About: The United (UNG)

The price of natural gas (short term delivery) bounced back during last week. According to the recent EIA report, last week's buildup in natural gas storage remained higher than the five year average. Will natural gas continue its upward trend? Let's examine the recent changes related to the natural gas market.

During last week, the future price of Henry Hub (short term delivery) rallied by 3.71%. Moreover, United States Natural Gas (NYSEARCA:UNG) also increased by 3.4%. As of last week, the Henry Hub future price was nearly $1.56 per million BTUs higher than the price during the same week last year. The recent rise of natural gas may have also slightly contributed to the rally of shares of major natural gas and oil producers such Chesapeake Energy Corporation (NYSE:CHK). During last week, Chesapeake's stock rose by 0.6%. If natural gas keeps increasing, it could raise the expected revenues of Chesapeake and thus positively affect the company's stock price.

The chart below shows the developments in the price of natural gas between February and May. As seen, natural gas prices have moved in an unclear trend in the past couple of weeks.


According to the latest EIA weekly report, the underground natural gas storage rose (for the fifth time this season) by 99 Bcf to reach 1,964 Bcf. In comparison, the storage increased by 61 Bcf during the same week in 2012 and by 83 Bcf based on the five years average. The current storage for all lower 48 states was 26.1% below last year's storage and 4.1% below the 5-years average. The table below presents the changes in storage during April and May (for six weeks) in the past few years. As seen, the average buildup in 2013 was the highest since 2010. The rise in the pace in storage buildup may drag down the price of natural gas.


From the demand standpoint, during last week, the average U.S. NG consumption inched up by 0.1% (week over week). The consumption was still 4.5% below the natural gas consumption recorded during the same week last year. The power sector led the charge with a 9.7% rise (week over week); it was 19.7% lower than last year. Conversely, the residential/commercial sector's demand fell by 7.4% (week over week), but was 13.2% higher than last year's consumption. Finally, the industrial sector's demand declined by nearly 1.5% (w-o-w). As a result, the total demand for NG edged up by 0.1% compared to last week's. The total demand was still 3.9% lower than the demand during the same week in 2012. Nonetheless, the recent rise in the demand for natural gas mainly in the power sector may have partly contributed to the rally in the price of natural gas during last week.


From the Supply standpoint, the gross natural gas production inched up by 0.06% during last week; it remained 2.3% above the production in 2012. Conversely, imports from Canada fell last week by 3% (week-over-week); the imports were 0.05% above the levels during the same week in 2012. The total U.S. natural gas supply slightly declined by 0.15% compared to last week. The decline in supply may have partly contributed to the recent rally of natural gas prices.

Based on the recent weekly report by Baker Hughes, the natural gas rotary rig count rose by 4 and reached 354 rigs. The rig count is 41% below the number of rigs recorded during the same week last year.

So the natural gas supply slightly fell while demand moderately increased compared to last week. But according the EIA's supply/demand balance, the supply is still higher than the demand. Moreover, compared to the same week last year, the demand fell while the supply rose. Therefore, the natural gas market loosened compared to the same time last year.

Tornado Season is Starting

During the previous week, the U.S. temperatures (on a national level) were normal, but 6.1 degrees cooler than the same week in 2012. In the following days, the temperatures are expected to reach above average in the Northeast and Midwest. In parts of the Midwest and South, there are threats of severe storms and tornadoes during the week. In the next two weeks, the temperatures in most parts of the U.S., including the Northeast and West, are projected to reach above normal temperatures, but temperatures will remain below normal in parts of the Gulf Coast region. The precipitation is expected to reach above normal in the North and on the East Coast. On a national level, the heating degrees for this week are projected to be slightly below normal; however, they are expected to be above the heating degrees recorded in the same week in 2012. The projected rise in temperatures in the U.S., mainly in the Northeast ,might further pull down the demand for natural gas for heating purposes. Therefore, if the temperatures keep increasing, we might see a further drop in demand for natural gas.

What's Next for Natural Gas?

From the supply and demand standpoints: the recent sharp rise in consumption in the power sector and the moderate decline in supply may have contributed to the rally in the price of natural gas during last week. If the demand for natural gas in the power sector continues to rise, it could keep the price of natural gas from tumbling down. Conversely, the ongoing expected rise in temperatures is likely to further diminish the demand for natural gas for heating purposes; this trend will bring down consumption in the residential/commercial sectors. If the weather keeps heating up, and if the demand for natural gas in the residential/commercial continues to decline, I project the price of natural gas will resume its downward trend.

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

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.