Will The Natural Gas Market Continue To Cool Down?

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 |  Includes: UNG
by: Lior Cohen

The natural gas market is cooling down as the price of natural gas tumbled down during last week. Based on the recent EIA update, last week's buildup in natural gas storage was higher than the five year average. Will natural gas further decline? Let's examine the latest changed in the natural gas market.

During the previous week, the Henry Hub (short term delivery) fell by 3.9%. Moreover, United States Natural Gas (NYSEARCA:UNG) also decreased by 4.1%. As of last week, the price of Henry Hub was nearly $1.75 per million BTUs higher than the price during the same week last year. The recent decline of natural gas price may have slightly contributed to the fall of shares of major natural gas and oil producers such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake's stock declined by 0.9%. If natural gas will keep falling it could lower the expected revenues of Chesapeake and thus adversely affect the company's value.

The chart below shows the developments in the price of natural gas in recent months. As seen, natural gas prices have declined in the past couple of weeks.

Click to enlarge

Storage

According to the latest EIA weekly update, the underground natural gas storage rose (for the eighth time this season) by 111 Bcf to reach 2,252 Bcf. In comparison, the storage rose by 62 Bcf during the same week last year and by 94 Bcf based on the five years average. The current storage for all lower 48 states was 21.5% below last year's storage and 3% below the 5-years average. The table below presents the developments in storage during the past several weeks (for nine weeks) in the past several years. As seen, the average buildup during this year (so far) was the highest in the past couple of years.

Demand

From the demand standpoint, during last week, the average U.S NG consumption rose by 3.6% (week over week). The consumption was 5.3% below the natural gas consumption recorded during the same week in 2012. The power sector led the charge with a 25.1% gain (week over week); it was still 8.4% lower than last year. Conversely, the residential/commercial sector's demand plummeted by 17.5% (week over week) and was 5.6% lower than last year's consumption. Finally, the industrial sector's demand slipped by nearly 1.6% (w-o-w). As a result, the total demand for NG rose by 3.6% compared to last week's. The total demand was 4.9% lower than the demand during the same week in 2012. If the total demand will continue to rally, it could pressure up the price of natural gas.

Supply

From the Supply standpoint, the gross natural gas production edged down by 0.4% during last week; it remained 2.6% above the production last year. Conversely, imports from Canada sharply rose last week by 16.3% (week-over-week); the imports were still 4.9% below the levels during the same week in 2012. The total U.S natural gas supply increased by 0.95% compared to last week.

Based on last week's update by Baker Hughes, the natural gas rotary rig count remained flat at 354 rigs. The rig count is still 37% below the number of rigs recorded during the same week last year. If the supply will continue to pick up, it could further pull down natural gas prices.

So the natural gas supply slightly increased (mainly due to the rise in imports); the demand rose compared to last week (mainly due to the rise in power sector consumption). According the EIA's supply/demand balance, the supply remains above the total demand. Finally, compared to the same week in 2012, the demand decreased while the supply rose. Therefore, the natural gas market slightly tightened compared to last week but loosened compared to the same week last year.

Weather and natural gas

During the previous week, the U.S temperatures (on a national level) were 1.1 degree cooler than normal and 6.1 degree cooler than the same week last year. In the following days, the temperatures are expected to slide to below average temperature in the Northeast and Midwest. In the following two weeks, the temperatures in many parts of the U.S the temperatures are projected to be above normal except for parts of the West Coast and parts of the Northeast. The precipitation is expected to be above normal in most of the East Coast. On a national level, the heating degrees for this week are projected to be slightly below normal. At the same time, the cooling degrees will be moderately above normal during next week. If these projections will follow through, then the demand for natural gas in the residential/commercial and power sectors will dwindle. In the power sector, if the price of natural gas further decline, it could lead to a rise in the demand for natural gas in this sector.

The bottom line

Based on the above, the recent developments in the supply and demand suggest the natural gas market is slowly loosening. Moreover, if the demand for natural gas in the residential/commercial sector continues to fall, the price of natural gas is likely to follow and slowly dwindle. On the other hand, the ongoing rising demand for natural gas in the power sector is likely to keep natural gas from tumbling down. If the storage buildup will continue to rise at a faster than normal pace, this could keep pulling down natural gas prices. Finally, if the temperatures will remain near normal levels, and if the demand for natural gas in the residential/commercial will keep declining, I guess the natural gas price will resume its downward trend.

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.