Will Natural Gas Rally From Its Recent Fall?

 |  Includes: CVX, UNG
by: Lior Cohen

The natural gas market has cooled down in recent weeks. According to the latest U.S. Energy Information Administration report, last week's buildup in natural gas storage was higher than the five-year average buildup. Will natural gas price change direction and bounce back? Let's analyze the recent developments in the natural gas market.

During last week, the price of Henry Hub (short-term delivery) decreased by 1.5%. Furthermore, United States Natural Gas (NYSEARCA:UNG) also declined by 1.2%. As of last week, the Henry Hub price was still $0.62 per million BTUs higher than the price during the same week in 2012. The recovery of natural gas may have contributed to the rise of shares of gas and oil producers such Chevron (NYSE:CVX): During last week, Chevron's stock decreased by 2.8%. If natural gas continues to fall, this could cut down the expected revenues of Chevron and thus slightly adversely affect the company's value.

The chart below shows the progress of the price of natural gas and UNG during the past year. Prices are normalized to October 1st, 2012. As seen below, UNG has under-performed the price of natural gas by nearly 20 percentage points because of Contango that led to roll-decay.

Click to enlarge


Based on the latest EIA weekly report, the underground natural gas storage increased by 101 Bcf and reached 3,487 Bcf. In comparison, in 2012 the storage increased by 77 Bcf; the five years average also rose by 82 Bcf. The current storage for all lower 48 states is 4.5% below last year's storage and 1.4% higher than the 5-years average. The table below shows the changes in storage in the past several years. As seen below, the average buildup this year (so far) is at its highest level since 2009.


From the demand standpoint, during last week, the average U.S. natural-gas consumption declined by 0.6% (week-over-week). The consumption was also 7.6% below the natural gas consumption recorded during the same week last year. The residential/commercial sector led the way with a 1.7% decrease (week-over-week); it was also 2.9% lower than last year. Conversely, the power sectors' demand slightly rose by 0.3% (week-over-week) but was 15.5% lower than last year's consumption. Finally, the industrial sector's demand slightly declined by nearly 0.7% (week-over-week). In total, the demand for NG decreased by 0.7% compared to last week. The total demand was also 7.7% lower than in 2012. If the total demand continues to fall, it could pressure down the price of natural gas.


From the Supply standpoint, the gross natural gas production rose by 0.8% during last week; it was only 0.1% below the production level last year. On the other hand, imports from Canada declined by 3.9% (week-over-week); imports were also 12.2% lower than in 2012. The total U.S. natural gas supply slightly increased by 0.32% compared to last week.

According to Baker Hughes' recent weekly report, the natural gas rotary rig count slightly rose by 2 rigs to 378 rigs. The rig count is still 14% below the number of rigs recorded in 2012. If the supply continues to rally, it will also drag down the price of natural gas.

Therefore, during last week, the natural gas supply slightly rose; the demand, however, declined (due to weaker demand in the residential/commercial sector). According to the EIA's supply/demand balance, the supply continues to be above the total natural gas consumption. Further, the gap between the two has further widened in recent weeks. Therefore, the natural gas market is slightly loose compared to last week.

Weather and natural gas

During last week, the U.S. temperatures (on a national level) were close to normal: They were 0.3 degree cooler than normal and 0.9 degree warmer than the same week last year. The temperatures are expected to rise mainly in the East coast including the Northeast, but they are projected to fall in the West. The heating season is likely to start next month. Considering the expected rise in temperatures in the East, the demand for natural gas in the residential/commercial sector is likely to keep falling down in the coming weeks.

The cooling degrees days across the U.S. are projected to be slightly higher than last year and slightly lower than normal. If cooling degrees days remain lower than normal, this pressure could also pull down the demand for natural gas in the power sector.

Final Thoughts

The expected rise in temperatures in the East coast is likely to keep the demand for natural gas in the residential/commercial sector from rising. The demand for natural gas in the power sector might continue to rise but not by much considering the current expectations about the upcoming cooling degrees. Finally, the ongoing looseness in the natural gas market suggests the price of natural gas will continue to fall in the coming weeks.

For further reading see "Will These Coal Companies Make a Comeback?"

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.