Will Natural Gas Continue To Tumble?

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 |  Includes: BOIL, CVX, DCNG, DGAZ, GASZ, GAZ, KOLD, NAGS, UGAZ, UNG, UNL
by: Lior Cohen

The natural gas market has kicked off November with sharp drops to its price. United States Natural Gas (NYSEARCA:UNG) has also tumbled down in the past several days. Based on the recent U.S Energy Information Administration report, last week's buildup in natural gas storage was lower than the five-year average buildup. Will natural gas prices continue to fall? Let's examine the latest developments in the natural gas market.

During November (up-to-date), the price of Henry Hub (short term delivery) fell by 3.8%. Furthermore, United States Natural Gas also declined by 3.83%. As of the previous week, the Henry Hub price remained $0.28 per million BTUs higher than the price during the same week in 2012. The recent fall of natural gas may have contributed to the drop of shares of gas and oil producers such as Chevron (NYSE:CVX): During the month, Chevron's stock declined by 1.6%. If natural gas continues to decline, this could reduce the expected revenues of Chevron and thus slightly adversely affect the company's value.

The chart below presents the progress of the price of natural gas and UNG during the past twelve months. Prices are normalized to November 1st, 2012. As you can see below, UNG has under-performed the price of natural gas by nearly 15 percentage points because of Contango that led to roll-decay.

(click to enlarge)Click to enlarge

Storage

According to the recent EIA weekly update, underground natural gas storage rose by only 38 Bcf and reached 3,779 Bcf. In comparison, in 2012 storage rose by 65 Bcf; the five years average also rose by 56 Bcf. The current storage for all lower 48 states is 3.1% below last year's storage and 1.6% higher than the 5-years average. The table below presents the changes in storage in the past several years. As seen below, the average buildup this year (so far) is close to the levels recorded in 2009-2011.

Demand

From the demand side, during last week, average U.S natural-gas consumption rose by 4.9% (week-over-week). The consumption was also 4.5% above the natural gas consumption recorded during the same week last year. The residential/commercial sector led the way with a 14.1% increase (week-over-week); it was also 15.9% higher than last year. Conversely, the power sectors' demand slightly fell by 1.2% (week-over-week) and was 4.3% lower than last year's consumption. Finally, the industrial sector's demand slightly increased by nearly 0.6% (week-over-week). In total, the demand for NG increased by 5.2% compared to last week. The total demand was also 4.4% lower than in 2012. If the total demand continues to rise, it could pressure up the price of natural gas.

Supply

From the supply side, gross natural gas production increased by 0.9% during last week; it was also 1.7% below the production level last year. Conversely, imports from Canada inched down by 0.1% (week-over-week); imports were also 3.9% lower than in 2012. Total U.S natural gas supply slightly rose by 0.8% compared to last week.

According to Baker Hughes' recent weekly report, the natural gas rotary rig count fell by 16 rigs to 360 rigs. The rig count is also 15% below the number of rigs recorded in 2012. If the supply continues to fall, it may pressure up the price of natural gas.

Therefore, during the previous week, the natural gas supply slightly increased. Demand, however, sharply rose mainly due to stronger demand in the residential/commercial sector. According to the EIA's supply/demand balance, the supply is close to total natural gas consumption. Further, the gap between the two has contracted in recent weeks. Therefore, the natural gas market has slightly tightened compared to last week.

Weather and natural gas

During the previous week, U.S temperatures (on a national level) were cooler than normal: They were 1.9 degrees cooler than normal and 5.4 degrees cooler than the same week last year. The cooler weather may have contributed to the smaller than normal buildup. The temperatures are expected to increase mainly in the East coast and Midwest, but they are projected to drop throughout the West coast. Considering the expected rise in temperatures in the East, the demand for natural gas in the residential/commercial sector is likely to fall in the coming weeks.

The heating degrees days across the U.S are projected to be lower than last year and slightly lower than normal. If heating degrees days remain lower than normal, this could curb the recent rise in demand for natural gas.

Conclusion

The recent rise in demand for natural gas and lower than normal buildup weren't enough to pull up the price of natural gas. Moreover, the tighter natural gas market could also pressure up the price of natural gas. Nonetheless, the expected higher than normal temperatures in the East Coast and the low HDD are likely to curb down the recent rise in demand for natural gas in the residential/commercial sector. These factors are likely to maintain the recent downward trend of natural gas price.

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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.