The price of natural gas has spiked last week to pass the $5 mark - the highest level since June 2010. United States Natural Gas (NYSEARCA:UNG) has also jumped during last week. The cold weather has pressured up the price of natural gas. Despite the sharp rise in demand for natural gas, the U.S Energy Information Administration reported that last week's extraction from storage was lower than last year's withdrawal. Will natural gas change direction? Let's review the recent changes in the natural gas market.
During January (up-to-date), the price of Henry Hub (short-term delivery) jumped by 22.5%. Furthermore, United States Natural Gas also increased by 19%. As of last week, the Henry Hub price was also $0.85 per million BTUs higher than the price during the same week in 2013. Last week's sharp rise in the price of natural gas may have contributed to the moderate rise of shares of gas and oil producers such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake's stock rose by 5.6%. If the natural gas price continues to rise, this could slightly improve Chesapeake's expected revenues and may slightly improve the company's valuation.
The chart below presents the changes in the price of natural gas and UNG in the past several months. Prices are normalized to January 31st, 2013. As seen below, UNG has under-performed natural gas by roughly 24 percentage points due to Contango that led to roll-decay.
According to the EIA weekly report, underground natural gas storage fell by 107 Bcf and reached 2,423 Bcf. In comparison, in 2013 the storage dropped by 194 Bcf. The five-years average extraction was 157 Bcf. The current storage for all lower 48 states is 19.8% lower than last year's storage and 13.2% 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, the high extraction rate of recent weeks has pushed up the average weekly price of natural gas. If this week's extraction rate reaches above normal levels, this might keep the price of natural gas high.
From the demand side, during last week, average U.S natural gas consumption rose by 19.5% (week-over-week). The consumption was also 2.2% below the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the charge as they jumped by 28% and 19%, respectively. The residential/commercial sector's consumption was 6.1% higher than last year, while the power sector's demand was 4.1% below last year's levels. Finally, the industrial sector's demand slightly rose by 3.9%, week over week. In total, the demand for NG increased by 19% compared to last week. The total demand was also 2% higher than in 2013. If the total demand continues to rise, it could continue to positively affect the price of natural gas.
From the supply side, gross natural gas production rose by 1.7% during the previous week. It was also 4.3% higher than the production level last year. Moreover, imports from Canada increased by 9.4% week over week; imports were also 8.7% higher than in 2013. The total U.S natural gas supply rose by 2.5% compared to last week. If the supply continues to slowly pick up, it may pressure down the price of natural gas.
According to Baker Hughes' recent weekly update, the natural gas rotary rig count fell by 9 rigs to 356 rigs. The rig count is 18% below the number of rigs recorded in 2013.
Therefore, during last week, the natural gas supply rose, but the demand jumped mainly due to sharp increase in consumption in the residential/commercial and power sectors. Based on the EIA's supply/demand balance, the supply was much lower than total natural gas consumption, and the gap between the two has widened in the past week. If demand remains elevated, the gap between supply and demand will further widen. In such a scenario, the price of natural gas could remain at its high level.
Weather and natural gas
During the previous week, U.S temperatures averaged higher than normal. In the coming weeks, however, the latest forecasts show that temperatures may remain well below normal levels in the North, Midwest, Northwest and Mideast. The temperatures are expected to reach above normal levels in parts of the Southwest and East coast. Based on this projection of below normal temperatures in many parts of the U.S, the demand for natural gas in the residential/commercial sector is likely to remain elevated in the coming weeks. Further, the heating degrees days in the U.S are estimated to be higher than normal than last year. This could serve as another indication that the demand for heating will be higher than normal in the near future.
Following the staggering rise in the price of natural gas, the volatility in the natural gas market is likely to remain high. The expected increase in demand in the residential/commercial and power sectors may further widen the gap between supply and demand, which could tighten the natural gas market. Further, the projected colder than normal weather in many parts of the U.S, the high heating degrees and low storage levels are likely to maintain the price of natural gas elevated. Finally, these high price levels aren't likely to last long as imports should rise and cut down the gap between supply and demand.
For further reading see "Natural Gas Outlook for 2014."
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.