The natural gas market hasn't done much during the last week. According to the latest EIA update, last week's buildup in natural gas storage was roughly identical to the five-year average. Will natural gas prices resume their downward trend? Let's analyze the latest developments in the natural gas market.
During the past week, the price of Henry Hub (short-term delivery) rose by 1.5%. Moreover, United States Natural Gas (UNG) also increased by 1.1%. As of last week, the price of Henry Hub was nearly $0.96 per million BTUs higher than the price in 2012. The recent rise of natural gas price may have contributed to the rally of shares of natural gas and oil producers such Chevron (CVX): During last week, Chevron's stock rose by 1.8%. If natural gas will continue to rise it could lower 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 and UNG during the past year. Prices are normalized to July 11th, 2012. As seen, UNG has under-performed the price of natural gas due to Contango and roll decay.
Based on the recent EIA weekly report, the underground natural gas storage increased (for the twelfth consecutive week this season) by 72 Bcf to reach 2,605 Bcf. In comparison, during last year the storage rose by 39 Bcf; the five years average increased by 73 Bcf. The current storage for all lower 48 states is 15.9% below last year's storage and 1.1% below the 5-year average. The table below shows the developments in storage in the past several years. As seen below, the average buildup this year (so far) is the highest since 2010.
From the demand side, during last week, the average U.S. NG consumption rose by 3% (week over week). The consumption was still 8.8% below the natural gas consumption recorded during the same week in 2012. The power sector led the way with an 11.1% gain (week over week); it was still 15.5% lower than last year. On the other hand, the residential/commercial sectors' demand fell by 6.9% (week over week) and was 1.8% lower than last year's consumption. Finally, the industrial sector's demand slipped by nearly 1.7% (week over week). As a result, the total demand for NG rose by 3% compared to last week. The total demand was still 8.5% lower than the demand in 2012. If the total demand will continue to pick up, it could pull up the price of natural gas.
From the Supply side, the gross natural gas production slightly rose by 0.5% during last week; it remained 2% above the production last year. Moreover, imports from Canada increased by 9.3% (week-over-week); imports were still 10.2% lower than in 2012. The total U.S. natural gas supply rose by 1.3% compared to last week.
Based on Baker Hughes recent weekly update, the natural gas rotary rig count slightly rose by 2 rigs to 355 rigs. The rig count was still 35% below the number of rigs recorded during the same week last year. If the supply will continue to rise, it could drag down natural gas price.
Therefore, during last week, the natural gas supply slightly rose (mainly due to the increase in imports); the demand also increased (mainly due to strong demand in the power sector). Based on the EIA's supply/demand balance, the supply is still well above the total demand. Finally, compared to the same week in 2012, the current demand for natural gas declined; the current supply slightly rose. Therefore, the natural gas market slightly tightened compared to last week but remained loose compared to the same week last year.
Weather and natural gas
During last week, the U.S. temperatures (on a national level) were 0.3 degree warmer than normal but 0.6 degree cooler than the same week last year. The weather is starting to heat up across the U.S.; this trend is likely to further drag down the demand for natural gas in the residential/commercial sectors. The temperatures are expected to keep heating up mainly in the Northeast and west coast regions. In the coming week, the cooling degrees are expected to be higher than normal and the same as last year.
The bottom line
If the buildup in storage will start to rise again at a faster than normal rate, the natural gas market is likely to resume its downward trend in the near future. Moreover, if the demand for natural gas in the residential/commercial sectors will keep falling, the price of natural gas is likely to follow. On the other hand, the growing demand for natural gas in the power sector is likely to keep natural gas from plummeting as it did a couple of weeks ago. Finally, if temperatures will continue to pick up, which will lead to an increase in cooling degrees days, the demand for natural gas in the power sector will keep rising.