The price of natural gas jumped again and on Wednesday passed the $5.5 level - the highest level since January 2010. By the end of the week, however, natural gas tumbled down to below $5. United States Natural Gas (UNG) has also declined during last week. Despite the recent fall, natural gas is still traded at a high price compared to recent years mainly due to the cold weather. The U.S. Energy Information Administration reported that last week's natural gas depletion rate was much higher than the five-year average rate. The sharp rise in demand and decline in production have contributed to the rise in last week's withdrawal rate. Will natural gas market cool down? Let's analyze the recent developments in the natural gas market.
During January, the price of Henry Hub (short term delivery) spiked by 16.9%. The price of natural gas reached last week its highest level since late January 2010. Furthermore, United States Natural Gas also increased by 16.87%. As of last week, the Henry Hub price was also $1.82 per million BTUs higher than its price during the same week in 2013. Last week's elevated price of natural gas may have contributed to the rise of shares of gas and oil producers such as Chesapeake Energy (CHK): During the previous week, Chesapeake's stock slightly increased by 0.11%. If natural gas price falls, this could reduce Chesapeake's expected sales and may slightly cut down the company's valuation. The chart below shows the movement of the price of natural gas and UNG in last six months. Prices are normalized to July 31st, 2013. As you can see, UNG has underperformed natural gas by roughly 10.6 percentage points due to Contango that led to roll-decay.
Based on the EIA weekly update, the underground natural gas storage dropped by 230 Bcf and reached 2,193 Bcf. In comparison, in 2013 the storage declined by 194 Bcf; the five-year average extraction was 157 Bcf. The current storage for all lower 48 states is 22.5% lower than last year's storage and 16.6% lower than the 5-year average.
The table below shows the changes in storage and weekly prices during November-January. The table also presents the shifts during the same time last year and the five-year average.
As you can see, the high depletion pace of recent weeks has pushed up the average weekly price of natural gas to its highest level in years. If this week's extraction pace remains at its above normal levels, this might keep the price of natural gas elevated in the near future.
From the demand standpoint, during last week, the average U.S. natural-gas consumption rose again by 17.7% (week-over-week). The consumption was also 25% above the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the way again as they jumped by 23.4% and 17.6%, respectively. The residential/commercial sector's consumption was 32% higher than last year; the power sector's demand was 29.4% above last year's levels. Finally, the industrial sector's demand slightly rose by 4.1%, week over week. In total, the demand for NG spiked by 17.6% compared to last week. The total demand was also 24.2% higher than in 2013. If the total demand continues to rally, it could keep the price of natural gas at its currently high level.
From the supply standpoint, the gross natural gas production declined by 1.6% during last week; it was still 1.3% higher than the production level last year. Conversely, imports from Canada jumped by 18.4% week over week; imports were also 32% higher than in 2013. The total U.S. natural gas supply slightly rose by 0.5% compared to last week. If the supply continues to slowly rise, it may pressure down the price of natural gas.
Based on Baker Hughes' recent weekly update, the natural gas rotary rig count slightly rose by 2 rigs to 358 rigs. The rig count is still 17% below the number of rigs recorded in 2013.
Therefore, during the previous week, the natural gas supply slightly rose, but the demand spiked because of a sharp rise in demand in the residential/commercial and power sectors. According to the EIA's supply/demand balance, the supply remained well below the total natural gas consumption, and the gap between the two has widened in recent weeks. If demand remains much higher than the supply so that the gap between supply and demand remains wide, the price of natural gas could maintain its high position.
Weather and natural gas
During last week, U.S. temperatures were cooler than normal. In the coming weeks, the recent forecasts show that temperatures may continue to be below normal levels in most parts of East coast, Northwest and Mideast. The temperatures are expected to reach above normal levels in parts of the Southwest. 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 high in the coming weeks. Moreover, the heating degrees days in the U.S. are expected to remain above normal and last year. This could serve as another indication that the demand for heating will continue to be higher than normal in the coming weeks.
The high volatility in natural gas market is likely to remain in the coming weeks. The projected colder than normal weather in most parts of the U.S., the high heating degrees and low storage levels are likely to keep the natural gas tight. The consumption in the residential/commercial and power sectors is likely to maintain its high level, which will keep the wide gap between supply and demand. Finally, the ongoing rise in imports from Canada could eventually loosen the natural gas market, which may keep the price of natural gas from reaching new highs.