The price of natural gas has rallied to its highest level since July 2011. United States Natural Gas (NYSEARCA:UNG) has also increased in the past several weeks. Based on the latest U.S Energy Information Administration report, last week's withdrawal from natural gas storage was close to the five year average withdrawal. Will natural gas's recent rally slowdown? Let's examine the latest developments in the natural gas market.
During the month (up-to-date), the price of Henry Hub (short term delivery) jumped by 10.04%. Furthermore, United States Natural Gas also rallied by 11.8%. As of last week, the Henry Hub price was $0.64 per million BTUs higher than the price during the same week in 2012. The recent recovery of natural gas may have contributed to the rally of shares of gas and oil producers such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake's stock increased by 1.8%. If natural gas continues rally, this could augment the expected revenues of Chesapeake and may slightly positively affect the company's value.
The chart below presents the developments to the price of natural gas and UNG in the past twelve months. Prices are normalized to December 14th, 2012. As you can see, UNG has under-performed the price of natural gas by nearly 18 percentage points due to Contango that led to roll-decay.
According to the recent EIA weekly report, the underground natural gas storage dropped by 81 Bcf and reached 3,533 Bcf. In comparison, in 2012 the storage rose by 2 Bcf; the five years average extraction was 79 Bcf. The current storage for all lower 48 states is 7.2% lower than last year's storage and 3% lower than the 5-years average. The table below presents the shifts in storage during November-December of recent years. As you can see, this year's storage extraction pace is the highest since 2010.
From the demand side, during last week, the average U.S natural-gas consumption jumped by 34% (week-over-week). The consumption was also 43.1% above the natural gas consumption recorded during the same week in 2012. The residential/commercial and power sectors led the way with a 46.1% and 40.5% rise, respectively, week over week; these sectors' consumption levels were also about 66.2% and 40.5%, respectively, higher than last year's. Finally, the industrial sector's demand also rose by nearly 5.8%, week over week. In total, the demand for NG spiked by 33.4% compared to last week. The total demand was also 42.3% higher than in 2012. If the total demand continues to rise, it could pressure up the price of natural gas.
From the Supply side, the gross natural gas production declined by 3.4% during last week; it was, however, only 0.4% lower than the production level last year. Conversely, imports from Canada jumped by 30.5%, week over week; imports were also 64.1% higher than in 2012. The total U.S natural gas supply declined by 0.8% compared to last week.
According to Baker Hughes' recent weekly report, the natural gas rotary rig count declined by 6 rigs to 369 rigs. The rig count is also 11% below the number of rigs recorded in 2012. If the supply continues to contract, it may also pull up the price of natural gas.
Therefore, during last week, the natural gas supply decreased; the demand sharply rose mainly due to stronger demand in the residential/commercial and power sectors. Further, according to the EIA's supply/demand balance, the supply is much lower than the total natural gas consumption. This kind of trend is likely to raise the volatility of natural gas prices and keep prices elevated.
Weather and natural gas
Despite the sharp rise in consumption, during last week, the U.S temperatures (on a national level) were warmer than normal: They were 1.6 degree warmer than normal and 6.3 degree cooler than the same week last year. The cold weather may have contributed to the rise in storage withdrawal. The temperatures are expected to remain lower than normal mainly in the Northeast and higher than normal in the west cost and Florida. Considering the expected low temperatures in the Northeast, the demand for natural gas in the residential/commercial sector is likely to remain high in the coming weeks.
The heating degrees days across the U.S are projected to be higher than normal and last year. If heating degrees days remain higher than normal, this could pressure up the demand for natural gas.
The recent spike in demand for natural gas contributed to the rally of natural gas prices. The expectations for low temperatures in the Northeast and the high heating degrees are likely to maintain the rally of natural gas price. The tighter natural gas market is likely to keep pulling up natural gas price. On the other hand, the sharp rise in imports is likely to continue, which could curb down the upward trend of natural gas. The bottom line, natural gas is likely to keep its upward trend but at a slower pace than in previous weeks.
For further reading see" Is it Time to Invest in Liquefied Natural Gas?"
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.