The price of natural gas tumbled down last week. United States Natural Gas (NYSEARCA:UNG) has also followed and plummeted. Nonetheless, due to very low temperatures mainly in the Northeast and Midwest, the demand for natural gas spiked last week. Based on the latest U.S Energy Information Administration weekly report, last week's extraction from storage was higher than the previous week's extraction and the five-year average withdrawal. Will natural gas bounce back? Let's analyze the recent developments in the natural gas market.
During January (up-to-date), the price of Henry Hub (short-term delivery) decreased by 4.2%. Furthermore, United States Natural Gas also fell by 4.25%. As of last week, the Henry Hub price was $1.18 per million BTUs higher than the price during the same week in 2013. This month's decline in natural gas price may have contributed to the drop of shares of gas and oil producers such as Chesapeake Energy (NYSE:CHK). During last week, Chesapeake's stock fell by 2.7%. If natural gas price continues to fall, this could cut down Chesapeake's expected revenues and may slightly reduce the company's valuation.
The chart below shows the changes to the price of natural gas and UNG in the past several months. Prices are normalized to January 31st, 2013. As you can see, UNG has under-performed the price of natural gas by roughly 15.8 percentage points due to Contango that led to roll-decay.
According to the EIA, underground natural gas storage fell by 157 Bcf and reached 2,817 Bcf. In comparison, in 2013 the storage declined by 201 Bcf, and the five years average extraction was 128 Bcf. The current storage for all lower 48 states is 15.8% lower than last year's storage and 10.1% lower than the five-year average.
The table below presents the developments in storage and weekly prices during November-January. The table also shows the shifts during the same time last year and the five-year average.
As you can see, up to last week, the storage extraction pace was lower than last year but higher than the five-year average. If this week's extraction remains higher than normal, this might push back up the prices of natural gas.
From the demand side, during the previous week, the average U.S natural-gas consumption fell by 29.5% (week-over-week). The consumption was also 24.1% above the natural gas consumption recorded during the same week in 2013. Both the power and residential/commercial sectors led the charge with a 35.5% and 38% increase, respectively. These sectors' consumptions were also above last year's levels by 18.7% and 34.5%, respectively. Finally, the industrial sector's demand slightly rose by 6.1%, week over week. In total, the demand for NG increased by 30% compared to last week. The total demand was also 23.7% higher than in 2013. If the total demand continues to pick up, it could pressure up the price of natural gas.
From the supply side, gross natural gas production slipped by 2.8% during last week. It was also 1% higher than the production level last year. Conversely, imports from Canada rose by 17%, week over week. Imports were also 40% higher than in 2013. The total U.S natural gas supply edged down by 0.6% compared to last week. Some attribute this drop in production to the widespread well freeze-offs in Fayetteville Shale and northeast Pennsylvania.
According to Baker Hughes' latest weekly update, the natural gas rotary rig count fell by 15 rigs to 357 rigs. The rig count is 17% below the number of rigs recorded in 2013. If the supply doesn't rise, it may pull up the price of natural gas.
Therefore, during last week, natural gas supply slipped. The demand jumped mainly due to a sharp rise in consumption in the power and residential/commercial sectors. Moreover, based on the EIA's supply/demand balance, the supply is much lower than the total natural gas consumption, and the gap between the two has widened in recent weeks. This trend is likely to tighten the natural gas market, which is likely to pull back up the price of natural gas.
Weather and natural gas
Despite the record low temperatures in the Midwest last week, U.S temperatures averaged slightly warmer than normal levels. Looking forward, the current projections are that the temperatures may reach above normal levels throughout the West including the Midwest and only below normal in the Southeast. Based on this forecast of above normal temperatures in most of the U.S, the demand for natural gas in the residential/commercial sector could decline in the coming weeks. Moreover, the heating degrees days across the U.S are estimated to be lower than normal than last year. This could serve as another indication that the demand for heating won't be much higher than normal in the coming week.
Based on the above, the natural gas market has tightened in recent weeks. Last week's sharp drop in prices may result in a correction at the beginning of the week. Further, the following considerations are likely to maintain natural gas prices elevated: the current cold weather, low storage levels, and higher than normal withdrawals from storage. But higher than normal temperatures in most of the U.S and lower than normal heating degree days could loosen the natural gas market. These factors suggest the price of natural gas may continue to slowly decline.
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.