Is Natural Gas Changing Course?

Jan. 6.14 | About: The United (UNG)

The price of natural gas declined again last week. United States Natural Gas (NYSEARCA:UNG) has also followed and decreased. Due to the holiday season the U.S Energy Information Administration didn't release its weekly report, only the change in natural gas storage. During last week, the natural gas extraction from storage was well below the five-year average withdrawal. Will natural gas continue to fall? Let's examine the recent changes in the natural gas market.

During last week (up-to-date), the price of Henry Hub (short-term delivery) tumbled down by 2.34%. Furthermore, United States Natural Gas also fell by 1.2%. As of last week, the Henry Hub price was still $1.17 per million BTUs higher than the price during the same week in 2012. This month's drop of natural gas may have contributed to the fall of shares of gas and oil producers such as Chevron (NYSE:CVX): During the previous week, Chevron's stock fell by 0.7%. If the natural gas price continues to fall, this could cut down Chevron's expected revenues and may slightly reduce the company's valuation.

The chart below presents the developments to the price of natural gas and UNG in the past year. Prices are normalized to January 31st, 2013. As you can see, UNG has under-performed the price of natural gas by roughly 17 percentage points due to Contango that led to roll-decay.

Click to enlarge

Storage

Based on the EIA, underground natural gas storage declined by 97 Bcf and reached 2,974 Bcf. In comparison, in 2012 storage declined by 135 Bcf. The five year average extraction was 123 Bcf. The current storage for all lower 48 states is 15.9% lower than last year's storage and 8.9% lower than the five-year average.

The table below shows the developments in storage and weekly prices during November-December. The table also shows the changes during the same time last year and the five-year average.

Click to enlarge

As you can see, up to last week, the storage extraction pace was higher than the last year and the five-year average. If this week's extraction remains below normal, this might further drag down the price of natural gas. In order to determine this issue, let's turn the excepted changes in weather.

According to Baker Hughes' recent weekly update, the natural gas rotary rig count slightly fell by 2 rigs to 372 rigs. The rig count is also 15% below the number of rigs recorded in 2013. If the supply continues to contract, it may also pressure up the price of natural gas.

Weather and natural gas

During last week, U.S temperatures plummeted mainly in the Northeast and Midwest. This cold weather is expected to prolong during the next couple of week mainly in the Midwest. On the other hand, the current forecasts expect the temperatures to reach above normal levels throughout the East Coast and part of the Southwest. Considering the expected higher temperatures in most of the U.S, the demand for natural gas in the residential/commercial sector could fall in the coming weeks.

Moreover, the heating degrees days across the U.S are estimated to be slightly higher than normal and moderately lower than last year. This could serve as another indication that the demand for heating won't be much higher than normal in the upcoming week.

Conclusion

Based on the recent developments in the U.S the natural gas market might not reheat. The cold weather is likely to keep prices elevated. Nonetheless, the expected higher-than-normal temperatures in the Northeast and close-to-normal levels of heating degrees throughout the U.S could keep the prices of natural gas at their current position. Conversely, the Midwest is still expected to reach lower-than-normal temperatures, which could increase the demand for natural gas in the residential/commercial sectors in this region. Finally, the incomplete data from the EIA is likely to keep the uncertainty around the natural gas market until the next report which will be released on Thursday.

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.