The price of natural gas resumed its upward trend and passed the $6 mark during last week. United States Natural Gas (NYSEARCA:UNG) also sharply rose last week. According to the recent U.S Energy Information Administration weekly update, last week's natural gas withdrawal was above the five year average. Conversely, the sharp fall in demand didn't curb down the extraction rate from the natural gas storage. Will the price of natural gas remain elevated this week? Let's examine the recent developments in the natural gas market.
During February 2014, the price of Henry Hub (short term delivery) spiked by 24.1%. Moreover, United States Natural Gas also jumped by 14.5%. As of last week, the Henry Hub price was also $3.27 per million BTUs higher than its price during the same week in 2013. Last week's spike in the price of natural gas may have contributed to the increase of shares of natural gas related companies such as Cheniere Energy (NYSEMKT:LNG): During last week, Cheniere Energy's stock increased by 3.3%. If natural gas price continue to rise, this could improve Cheniere Energy's expected sales and may slightly rise the company's valuation.
The chart below presents the developments of the prices of natural gas and UNG in past several months. Prices are normalized to July 31st, 2013. As you can see, UNG has under-performed natural gas by roughly 26 percentage points due to Contango that led to roll-decay.
According to the EIA weekly report, the underground natural gas storage dropped by 250 Bcf and reached 1,443 Bcf - its lowest level since May 2008. In comparison, last year the storage declined by 127 Bcf; the five years average withdrawal was 118 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 presents the developments in storage and weekly rates in the past several weeks. The table also shows the changes in storage levels during last year and the five year average.
The high extraction rate of the past four weeks, mainly in the East region, has pressured up the average weekly price of natural gas. If this week's extraction rate remains higher than normal, this might keep the price of natural gas high in the near future.
From the demand side, during last week, the average U.S natural-gas consumption plunged by 24% (week-over-week). The consumption was also 3.4% below the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the fall as they decreased by 29.6% and 17.7%, respectively. The residential/commercial sector's consumption was 45.1% lower than last year; the power sector's demand was 27.4% below last year's levels. Finally, the industrial sector's demand slightly fell by 4.4%, week over week. In total, the demand for NG plummeted by 23.6% compared to last week. The total demand was also 3.4% lower than in 2013. If the total demand continues to fall, it could pressure down the price of natural gas.
From the Supply side, the gross natural gas production rose by 1.5% during last week; it was also 2.5% higher than the production level last year. Conversely, imports from Canada tumbled down by 15.9% week over week; imports were still 4.9% higher than in 2013. The total U.S natural gas supply slipped by 0.3% compared to last week. If the supply continues to fall, it may keep the price of natural gas elevated.
According to Baker Hughes' recent weekly update, the natural gas rotary rig count slightly rose by 5 rigs to 342 rigs. The rig count is still 20% below the number of rigs recorded in 2013.
Therefore, during last week, the natural gas supply slightly fell, but the demand tumbled down because of a sharp drop in demand in the residential/commercial and power sectors. Following the recent fall in demand, according to the EIA's supply/demand balance, the gap between the supply and demand narrowed significantly. But the demand remains higher than the supply. As long as the demand is above the supply, the price of natural gas could remain elevated.
Weather and natural gas
During the previous week, U.S temperatures were extremely cooler than normal. In the next two weeks, the current forecasts estimate that temperatures will remain well below normal in most of the East especially in the Northeast. This forecast suggests the demand for natural gas in the residential/commercial sector is likely to bounce back this week. Moreover, the U.S heating degrees days are expected to be above normal and last year. Thus, as long as the temperatures are expected to be lower than normal in the East, the demand for natural gas is likely to remain elevated.
The dwindling storage mainly in the East region is likely to maintain the price of natural gas elevated. Moreover, the projected lower than normal temperatures are likely to keep the demand for natural gas high in the coming weeks. But the narrower gap between supply and demand could bring down the price of natural gas from its currently very high level.
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.