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The price of natural gas changed course and plummeted below $4.8 during last week. United States Natural Gas (NYSEARCA:UNG) also decreased. Even though natural gas lost more than 3.4% since the beginning of February, the price of natural gas is still traded at a higher than normal level. According to the recent U.S Energy Information Administration weekly report, last week's natural gas withdrawal was much higher than the five year average rate; the recent fall in demand didn't curb down last week's withdrawal rate. Will the price of natural gas continue to fall? Let's examine the recent changes in the natural gas market.

During February 2014, the price of Henry Hub (short term delivery) fell by 3.4%. Moreover, United States Natural Gas also decreased by 2.3%. As of last week, the Henry Hub price was still $1.96 per million BTUs higher than its price during the same week in 2013. Last week's drop in the price of natural gas may have contributed to the fall of shares of gas and oil producers such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake's stock sharply decreased by 8.6%. If natural gas price continue to decline, this could cut down Chesapeake's expected sales and may slightly reduce the company's valuation.

The chart below presents the developments in the price of natural gas and UNG in past six months. Prices are normalized to July 31st, 2013. As seen, UNG has under-performed natural gas by roughly 8.9 percentage points due to Contango that led to roll-decay.

(click to enlarge)

Source: Google Finance and EIA

Storage

According to the EIA weekly report, the underground natural gas storage declined by 270 Bcf and reached 1,923 Bcf- its lowest level since May 2013. In comparison, last year the storage fell by 118 Bcf; the five years average withdrawal was 143 Bcf. The EIA pointed out that current working gas storage in the East region is at a record low. The current storage for all lower 48 states is 28.8% lower than last year's storage and 22.4% lower than the 5-years average.

The table below presents the shifts in storage and weekly rates between November and January. The table also shows the changes in storage levels during last year and the five year average.

Source: EIA

As seen in the table above, the high depletion rate of recent weeks, mainly in the East region, has pressured up the average weekly price of natural gas to such a high level. If this week's extraction rate remains above normal levels, this might keep the price of natural gas high in the coming weeks.

Demand

From the demand side, during the previous week, the average U.S natural-gas consumption declined by 15.5% (week-over-week). The consumption was still 5.7% above the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the way as they plunged by 18.2% and 19.3%, respectively. The residential/commercial sector's consumption was still 9.9% higher than last year; the power sector's demand was 0.3% below last year's levels. Finally, the industrial sector's demand slightly declined by 3.7%, week over week. In total, the demand for NG plummeted by 15.2% compared to last week. The total demand was still 5.6% higher than in 2013. If the total demand falls further, it could cut down the price of natural gas.

Supply

From the Supply side, the gross natural gas production inched up by 0.3% during last week; it was also 1.8% higher than the production level last year. Conversely, imports from Canada tumbled down by 17.9% week over week; imports were 16.5% higher than in 2013. The total U.S natural gas supply slipped by 2% compared to last week. If the supply continues to slowly fall, it may pressure up the price of natural gas.

Based on Baker Hughes' recent weekly report, the natural gas rotary rig count fell by 7 rigs to 351 rigs. The rig count is also 17.4% below the number of rigs recorded in 2013.

Therefore, during last week, the natural gas supply slightly declined, but the demand tumbled down because of a sharp fall in demand in the residential/commercial and power sectors. Despite the recent fall in demand, according to the EIA's supply/demand balance, the supply remained well below the total natural gas consumption. But the difference between the two has narrowed last week. As long as the demand remains much higher than the supply, the price of natural gas could remain at its currently high level.

Weather and natural gas

During the previous week, U.S temperatures were much cooler than normal. In the next couple of weeks, the current forecasts estimate that temperatures may continue to be below normal at certain parts in the Northwest. Based on this projection of below normal temperatures in only a few parts in the U.S, the demand for natural gas in the residential/commercial sector is likely to decline in the coming weeks. Conversely, the heating degrees days in the U.S are expected to be slightly above normal and last year. This could serve as another indication that the demand for heating will be close to normal in the coming weeks.

Bottom line

On the one hand, the sharp drop in storage mainly in the East region is likely to pressure up the price of natural gas. Further, the very low storage level in the east region is likely to maintain the price of natural gas at a higher than normal level. On the other hand, the recent decline in consumption could pull down the prices of natural gas. Looking forward, the weather is likely to be normal or above-normal in most parts of the U.S, which could also suggest the demand for natural gas will diminish in the near future. Finally, the lower than normal heating degrees is also an indicator for the drop consumption in the residential/commercial sector. Therefore, natural gas could continue to fall down in the near future.

For further reading see "Is Chesapeake Heading at the Right Direction?"

Source: Will Natural Gas Keep Falling?