The natural gas market is reheating as the price of natural gas rallied in the past couple of weeks. Based on the latest EIA update, last week's buildup in natural gas storage was lower than the five year average. Will natural gas continue to trade up? Let's analyze the latest developments in the natural gas market.
During the previous week, the Henry Hub (short term delivery) rose again by 4.5%. Moreover, United States Natural Gas (NYSEARCA:UNG) also increased by 4.4%. As of last week, the price of Henry Hub was nearly $1.46 per million BTUs higher than the price during the same week in 2012. The latest rally of natural gas may have slightly contributed to the recovery of shares of major natural gas and oil producers such Chevron Corporation (CVX). During the previous week, Chevron's stock rose by 1.6%. If natural gas will keep rising it could raise the expected revenues of Chevron and thus positively affect the company's value.
The chart below presents the changes in the price of natural gas in the past several months. As seen, natural gas prices have increased in the past couple of weeks.
Based on the recent EIA weekly update, the underground natural gas storage increased (for the sixth time this season) by 89 Bcf to reach 2,053 Bcf. In comparison, the storage rose by 77 Bcf during the same week last year and by 95 Bcf according to the five year average. The current storage for all lower 48 states was 24.9% below last year's storage and 3.9% below the 5-year average. The table below shows the developments in storage during the past several weeks (for seven weeks) in recent years. As seen, the average buildup during the year so far was the highest since 2010.
From the demand side, during the previous week, the average U.S NG consumption fell by 1.6% (week over week). The consumption was also 4.6% below the natural gas consumption recorded during the same week in 2012. The residential/commercial sector led the fall with a 23.1% tumble (week over week); it was 3.5% lower than last year. Conversely, the power sector's demand spiked by 17.5% (week over week) but was 7.2% lower than last year's consumption. Finally, the industrial sector's demand declined by nearly 2.6% (w-o-w). As a result, the total demand for NG fell by 1.5% compared to last week's. The total demand was also 4% lower than the demand during the same week in 2012. If the total demand will continue to fall, it could pressure down the price of natural gas.
From the Supply side, the gross natural gas production edged up by 0.2% during last week; it remained 2.2% above the production in 2012. Further, imports from Canada inched up last week by 0.1% (week-over-week); the imports were 2.6% below the levels during the same week in 2012. The total U.S natural gas supply rose slightly by 0.2% compared to last week.
According to the latest weekly report by Baker Hughes, the natural gas rotary rig count remained unchanged at 354 rigs. The rig count is still 40% below the number of rigs recorded during the same week in 2012. If the supply will continue to slowly rise, it could pressure down the price of natural gas.
So the natural gas supply rose slightly while demand decreased compared to last week. Moreover, according the EIA's supply/demand balance, the supply remains higher than the demand. Finally, compared to the same week in 2012, the demand declined while the supply increased. Therefore, the natural gas market loosened compared to last week and compared to the same week last year.
Temperatures Are Picking Up
During last week, the U.S temperatures (on a national level) were 1 degree warmer than normal but 1 degree cooler than the same week last year. In the coming days, the temperatures are expected to remain below average in the Northeast. In parts of the Midwest and South the temperatures might be slightly below normal. In the next two weeks, the temperatures in many parts of the U.S including the Northeast and Midwest are projected to be above normal. Conversely, the temperatures will remain below normal in parts of the Gulf Coast region. The precipitation is projected to remain above normal in the North and part of the East Coast. On a national level, the heating degrees for this week are expected to be below normal. At the same time, the cooling degrees will be above normal during the upcoming week. If these projections come through the demand for natural gas in the residential/commercial sector will continue to dwindle. At the same time the demand in the power sector might pick up. I say might because the EIA also estimates in its May report that the cooling degree days will rise in April-September 2013 compared to its previous estimate - i.e. a higher consumption of natural gas for electricity. Nonetheless, the expected consumption this season will remain lower than last year's season. Furthermore, the high price in natural gas (compared to last year) led the EIA to revise downward its expected demand for natural gas in the power sector.
What's Up Ahead for Natural Gas?
From the supply and demand developments: the recent drop in consumption in the residential/commercial sector and the moderate rise in supply may curb the recent rally in the price of natural gas. If the demand for natural gas in the power sector will keep increasing, it could keep pulling up the price of natural gas. Nonetheless, the high price of natural gas compared to last year is likely to eventually bring down the demand for natural gas in the power sector. Moreover, the ongoing increase in temperatures is likely to keep the demand for natural gas dwindling in the residential/commercial sector. If the temperatures keep rising, and if the demand for natural gas in the residential/commercial will keep falling, I guess the natural gas market will cool down.
For further reading see "Is Natural Gas heading to a New High?"
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.