The natural gas market has heated up in the past couple of weeks. United States Natural Gas ETF (UNG) has also rallied in the past couple of weeks. According to the recent U.S Energy Information Administration report, last week's withdrawal from natural gas storage was lower than the five-year average withdrawal. Will natural gas price continue to rise? Let's analyze the recent developments in the natural gas market.
During last month (up-to-date), the price of Henry Hub (short term delivery) sharply increased by 10.42%. Furthermore, United States Natural Gas also rallied by 7.8%. As of last week, the Henry Hub price was only $0.02 per million BTUs higher than the price during the same week in 2012. The recent rise of natural gas may have contributed to the recovery of shares of gas and oil producers such as Chesapeake Energy (CHK): During last week, Chesapeake's stock rose by 1.8%. If natural gas continues rise, this could augment the expected revenues of Chesapeake and thus slightly positively affect the company's value.
The chart below shows the changes to the price of natural gas and UNG in the past twelve months. Prices are normalized to November 30th, 2012. As you can see, UNG has under-performed the price of natural gas by nearly 17 percentage points due to Contango that led to roll-decay.
Based on the latest EIA weekly report, the underground natural gas storage fell by 14 Bcf and reached 3,776 Bcf. In comparison, in 2012 the storage rose by 4 Bcf; the five years average extraction was 17 Bcf. The current storage for all lower 48 states is 2.6% higher than last year's storage and only 0.5% higher than the 5-years average. The table below shows the changes in storage during November of recent years. As you can see below, the change in storage is very erratic with no clear pattern during this time of the year.
From the demand standpoint, during the previous week, the average U.S natural-gas consumption fell by 6% (week-over-week). The consumption was also 2.2% above the natural gas consumption recorded during the same week in 2012. The residential/commercial and power sectors led the way with a 7.5% and 7.6% drop, respectively (week-over-week) these sectors' consumption levels were also about 3% lower than last year's. Finally, the industrial sector's demand also decreased by nearly 2.1% (week-over-week). In total, the demand for NG decreased by 7.5% compared to last week. The total demand was also 1.7% lower than in 2012. If the total demand resumes its upward trend, it could pressure up the price of natural gas.
From the supply standpoint, gross natural gas production slipped by 0.8% during last week. It was, however, 3% higher than the production level last year. Moreover, imports from Canada fell by 5% (week-over-week); imports were still 14.8% higher than in 2012. The total U.S natural gas supply declined by 1.1% compared to last week.
According to Baker Hughes' latest weekly report, the natural gas rotary rig count declined by 2 rigs to 367 rigs. The rig count is also 13% below the number of rigs recorded in 2012. If the supply continues to diminish, it may pull up the price of natural gas.
Therefore, during last week, the natural gas supply slightly decreased. The demand sharply fell mainly due to weaker demand in the residential/commercial and power sectors. Nonetheless, according to the EIA's supply/demand balance, the supply is much lower than total natural gas consumption. The supply/demand balance has changed direction in the past several weeks. This kind of trend is likely to raise the volatility of natural gas prices.
Weather and natural gas
During last week, U.S temperatures (on a national level) were cooler than normal: They were 1.9 degrees cooler than normal and 2 degrees cooler than the same week last year. The cooler weather may have contributed to the rise in storage withdrawal. The temperatures are expected to remain lower than normal mainly in the Northeast and Midwest. Considering the expected low temperatures throughout most of the U.S, the demand for natural gas in the residential/commercial sector is likely to rise in the coming weeks.
The heating degrees days across the U.S are projected to be lower than normal but much higher than last year. If heating degrees days remain lower than normal, this could curb the recent increase in demand for natural gas.
The recent drop in demand for natural gas and lower than normal extraction from storage didn't stop the recovery of natural gas prices. The expectations for the drop in temperatures are likely to keep the price of natural gas rising. Further, the tighter natural gas market could also keep pulling up natural gas prices. Conversely, the expected lower than normal HDD could curb down the recent rally in demand for natural gas in the residential/commercial sector. The bottom line, natural gas is likely to maintain its upward trend.
For further reading see "Will Chesapeake Start to Heat up Again?"