Will Natural Gas Change Direction Again?

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 |  About: The United States Natural Gas ETF, LP (UNG), Includes: CHK
by: Lior Cohen

The price of natural gas continues to move erratically as it passed the $5.2 mark by the end of last week. United States Natural Gas (NYSEARCA:UNG) also sharply increased last week. According to the latest U.S Energy Information Administration weekly report, last week's natural gas withdrawal was well above the five year average. Moreover, the rise in demand only contributed to the sharp drop in natural gas storage. Will the price of natural gas change direction again this week? Let's analyze the recent developments in the natural gas market.

During February 2014, the price of Henry Hub (short term delivery) rose by 5.5%. Moreover, United States Natural Gas also increased by 3.3%. As of last week, the Henry Hub price was also $3.09 per million BTUs higher than its price during the same week in 2013. Last week's jump in the price of natural gas may have contributed to the rise of shares of gas and oil producers such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake's stock increased by 2.2%. If natural gas price continue to rally, this could improve Chesapeake's expected sales and may slightly increase the company's valuation.

The chart below shows the progress of the prices of natural gas and UNG in past six months. Prices are normalized to July 31st, 2013. As you can see, UNG has under-performed natural gas by roughly 14.13 percentage points due to Contango that led to roll-decay.

(click to enlarge)Click to enlarge

Source: Google Finance and EIA

Storage

According to the EIA weekly update, the underground natural gas storage fell by 237 Bcf and reached 1,686 Bcf- its lowest level since April 2013. In comparison, last year the storage dropped by 157 Bcf; the five years average withdrawal was 173 Bcf. The current storage for all lower 48 states is 33.9% lower than last year's storage and 27.2% below the 5-years average.

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

Source: EIA

The high depletion pace of recent weeks, mainly in the East region, has pulled up the average weekly price of natural gas. 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 standpoint, during last week, the average U.S natural-gas consumption rose by 15.7% (week-over-week). The consumption was also 30.6% above the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the charge as they increased by 19.6% and 17.7%, respectively. The residential/commercial sector's consumption was 45.1% higher than last year; the power sector's demand was 21.7% above last year's levels. Finally, the industrial sector's demand slightly rose by 4.3%, week over week. In total, the demand for NG spiked by 15.4% compared to last week. The total demand was also 30.1% higher than in 2013. If the total demand continues to rise, it could pressure up the price of natural gas.

Supply

From the Supply standpoint, the gross natural gas production edged down by 0.5% during the previous week; it was still 0.7% higher than the production level last year. Conversely, imports from Canada rose by 5% week over week; imports were also 22.8% higher than in 2013. The total U.S natural gas supply inched up by 0.2% compared to last week. If the supply doesn't pick up at a faster pace, it may keep the price of natural gas elevated.

Based on Baker Hughes' recent weekly report, the natural gas rotary rig count dropped again by 14 rigs to 337 rigs. The rig count is also 20% below the number of rigs recorded in 2013.

Therefore, during the previous week, the natural gas supply slightly rose, but the demand spiked again because of a sharp increase in demand in the residential/commercial and power sectors. Following the recent rise in demand, according to the EIA's supply/demand balance, the gap between the supply and demand widened. Thus, as long as the demand remains much higher than the supply, the price of natural gas could remain high.

Weather and natural gas

During last week, U.S temperatures were cooler than normal. In the next couple of weeks, the current forecasts estimate that temperatures are likely to be well below normal in most of the East and parts of the Mideast. Based on this outlook of below normal temperatures in the East, the demand for natural gas in the residential/commercial sector is likely to rise in the coming weeks. Further, the heating degrees days in the U.S are expected to be above normal and last year. This could serve as another indication that the demand for heating will be higher than normal in the coming weeks.

Takeaway

The plunge in storage mainly in the East region is likely to keep the price of natural gas high. Further, the expected lower than normal temperatures are likely to maintain the high consumption for natural gas in the near future. Nonetheless, the high price of natural gas isn't likely to last long. Finally, if the supply continues to pick up, this could bring down the price of 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.