The natural gas market has rallied during the last week. Based on the recent EIA update, last week's buildup in natural gas storage was very close to the five-year average buildup. Will natural gas price continue to rise? Let's examine the latest changes in the natural gas market.
During the previous week, the price of Henry Hub (short term delivery) increased by 2.8%. Moreover, United States Natural Gas (NYSEARCA:UNG) also rose by 2.4%. As of last week, the Henry Hub price was nearly $0.70 per million BTUs higher than the price last year. The recovery of natural gas may have contributed to the rise of shares of gas and oil producers such Royal Dutch Shell (RDS.A). During the previous week, Shell's stock slightly increased by 0.3%. If natural gas further rises, this could raise the expected revenues of Shell and thus positively affect the company's value.
The chart below presents the developments in the price of natural gas and UNG during the past 13 months. Prices are normalized to August 1st, 2012. As seen below, UNG has under-performed the price of natural gas by nearly 25 percentage points due to Contango and roll-decay. Other securities that track natural gas, such as First Trust ISE Revere Natural Gas (NYSEARCA:FCG), have also experienced similar issues of roll decay.
According to the recent EIA weekly update, underground natural gas storage increased (for the twentieth consecutive week this season) by 67 Bcf to reach 3,130 Bcf. In comparison, during last year the storage rose by 66 Bcf. The five-year average increased by also 66 Bcf. The current storage for all lower 48 states is 7% below last year's storage and 1.5% higher than the five-year average. The table below presents the developments in storage in the past several years. As seen below, the average buildup this year (so far) is the highest in the past several years.
From the demand standpoint, during the previous week, average U.S natural gas consumption increased by 2.6% (week-over-week). The consumption was still 1.8% below the natural gas consumption recorded during the same week last year. The power sector led the way with an 8.5% gain (week-over-week); it was still 2.5% lower than last year. On the other hand, residential/commercial sector demand declined by 6.2% (week-over-week) but was 1.5% higher than last year's consumption. Finally, the industrial sector's demand declined by nearly 0.9% (week-over-week). In total, the demand for NG increased by 3% compared to last week. Total demand was still 1.1% lower than in 2012. If the total demand continues to pick up, it could positively affect the price of natural gas.
From the supply standpoint, gross natural gas production inched up by 0.1% during the previous week; it was also 3.2% above the production last year. Moreover, imports from Canada rose by 1.5% (week-over-week); imports were still 6.7% lower than in 2012. Total U.S natural gas supply edged up by 0.2% compared to last week.
According to Baker Hughes' recent weekly update, the natural gas rotary rig count slightly fell by 1 rig to 387 rigs. The rig count was still 20% below the number of rigs recorded during the same week in 2012. If the supply continues to increase, it will adversely affect the price of natural gas.
Therefore, during the previous week, the natural gas supply inched up. Demand also slightly increased (due to stronger demand in the power sector). According to the EIA's supply/demand balance, supply remains above total demand. Finally, compared to the same week last year, the current demand for natural gas was lower, while the current supply was higher. Therefore, the natural gas market has slightly tightened compared to last week but remained loose compared to the same week in 2012.
Weather and natural gas
During the past week, U.S temperatures (on a national level) were 0.3 degree cooler than normal and 0.6 degree warmer than the same week in 2012. Temperatures are expected to further heat up mainly in the West coast and South, but they are projected to remain low in the Northeast. This might suggest the demand for natural gas in the residential sector in the Northeast may rise in the coming weeks. The cooling degree days across the U.S are close to normal and to last year's. Next week, cooling degrees days are projected to be higher than normal and slightly lower than last year. If cooling degrees days remain higher than normal, this could pressure up the demand for natural gas in the power sector.
If temperatures continue to rise, which will lead to an increase in cooling degrees days, natural gas consumption in the power sector will strengthen. If the demand for natural gas in the power sector further rise, then the price of natural gas might continue to pull up toward the $4 mark. Finally, some other factors could also pressure up the price of natural gas including the potential rise in consumption in the residential/industrial sectors. Storage buildup continues to match the five-year average buildup - the supply remains stable.
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.