The price of natural gas has changed direction and fell during last week for the first time in December. United States Natural Gas (NYSEARCA:UNG) has also followed and declined in the past week. Based on the recent U.S Energy Information Administration weekly update, last week's extraction from storage was lower than the previous week's extraction but remained much higher than the five year average withdrawal. Will natural gas resume its rally? Let's analyze the recent developments in the natural gas market.
During December (up-to-date), the price of Henry Hub (short term delivery) jumped by 11.46%. Furthermore, United States Natural Gas also rallied by 10.6%. As of last week, the Henry Hub price was $0.91 per million BTUs higher than the price during the same week in 2012. This month's rally of natural gas may have contributed to the recovery of shares of gas and oil producers such as Chesapeake Energy (NYSE:CHK): During the previous week, Chesapeake's stock rose by 1.4%. If natural gas were to resume its upward trend, this could improve Chesapeake expected revenues and may slightly positively affect the company's valuation.
The chart below shows the changes to the price of natural gas and UNG in the past twelve months. Prices are normalized to December 28th, 2012. As you can see, UNG has under-performed the price of natural gas by roughly 18 percentage points due to Contango that led to roll-decay.
Based on the latest EIA weekly update, the underground natural gas storage fell by 177 Bcf and reached 3,071 Bcf. In comparison, in 2012 the storage declined by 72 Bcf; the five years average extraction was 120 Bcf. The current storage for all lower 48 states is 16.1% lower than last year's storage and 9.2% lower than the 5-years average. The table below shows the developments in storage during November-December of recent years. As you can see, this year's storage extraction pace is the highest of the past six years.
From the demand standpoint, during the previous week, the average U.S natural-gas consumption fell by 8.8% (week-over-week). The consumption was still 26.4% above the natural gas consumption recorded during the same week in 2012. The power sector led the way with a 15.5% drop, week over week; the residential/commercial sectors had an 8.9% decrease, week over week; these sectors' consumptions remained well above last year's levels by 15.4% and 44%, respectively. Finally, the industrial sector's demand slightly fell by 0.5%, week over week. In total, the demand for NG decreased by 8.6% compared to last week. The total demand was still 25.9% higher than in 2012. If the total demand changes direction and rises, it could pressure up the price of natural gas.
From the Supply standpoint, the gross natural gas production rose by 1.7% during the previous week; it was also 0.9% higher than the production level last year. Conversely, imports from Canada fell by 3.9%, week over week; imports were still 52% higher than in 2012. The total U.S natural gas supply rose by 1.2% compared to the previous week.
According to Baker Hughes' recent weekly report, the natural gas rotary rig count slightly rose by 2 rigs to 374 rigs. The rig count is still 13% below the number of rigs recorded in 2012. If the supply continues to expand, it may also pressure down the price of natural gas.
Therefore, during last week, the natural gas supply rose; the demand fell mainly due to weaker demand in the power and residential/commercial sectors. Further, according to the EIA's supply/demand balance, the supply is still lower than the total natural gas consumption, but the gap between the two has narrowed in recent weeks. This trend is likely to soften the natural gas market, which is likely to curb down the rally of natural gas.
Weather and natural gas
Despite the sharp drop in consumption, during last week, the U.S temperatures (on a national level) were cooler than normal: They were 9.1 degree cooler than normal and 15.1 degree cooler than the same week last year. The cold weather may have contributed to the high storage withdrawal in recent weeks. The temperatures are expected to remain well below normal mainly in the North and higher than normal in the parts of South west and Florida. Considering the expected low temperatures in most of the U.S, the demand for natural gas in the residential/commercial sector could rise in the coming weeks.
Conversely, the heating degrees days across the U.S are estimated to be lower than normal and last year. If heating degrees days remain lower than normal, this could reduce the demand for natural gas.
The analysis above paints an unclear picture regarding the potential progress of the natural gas market. ON the one hand, the projected low heating degrees days, compared to normal, suggest the natural gas might loosen. On the other hand, the expectations for low temperatures in most of the U.S are likely to keep natural gas prices elevated. The bottom line, these mixed signals could raise the volatility of the natural gas price, which may move in an unclear trend in the upcoming weeks.
For further reading see" Will Chesapeake Start to Heat up Again?"
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.