The natural gas market cooled down in the past week as the Henry Hub price tumbled down by 25% to $4.61. United States Natural Gas (NYSEARCA:UNG) also plummeted last week. According to the latest U.S. Energy Information Administration weekly report, last week's natural gas extraction was below the five year average. Will the price of natural gas bounce back from its recent tumble? Let's analyze the recent developments in the natural gas market.
During last month, the price of Henry Hub (short term delivery) fell by 6.8%. Conversely, United States Natural Gas rose by 5.5%. As of last week, the Henry Hub price was still $2.52 per million BTUs higher than its price during the same week in 2013. This means, despite the recent drop in the price of natural gas, it's still high for the season. Last week's plunge in the price of natural gas may have contributed to the decrease of shares of natural gas related companies such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake Energy's stock decreased by 2.5%. If natural gas prices continue to fall, this could improve Chesapeake Energy's expected sales and may slightly reduce the company's valuation.
The chart below shows the developments of the prices of natural gas and UNG in the past several months. Prices are normalized to August 30th, 2013. As you can see, UNG has out-performed natural gas by roughly 6 percentage points due to the shift from Contango to Backwardation in the futures market. This recent shift might suggest the market expectations are that the price of natural gas will fall in the coming weeks.
According to the EIA weekly update, the underground natural gas storage decreased by 95 Bcf and reached 1,348 Bcf - its lowest level since May 2008. In comparison, last year the storage fell by 171 Bcf; the five years average withdrawal was 122 Bcf. The current storage for all lower 48 states is 40.2% lower than last year's storage and 34.5% below the 5-years average.
The table below shows the developments in storage and weekly rates in the past several weeks. The table also presents the changes in storage levels during last year and the five year average.
Last week's extraction rate was much lower than five year average and last year's. If this week's extraction rate remains lower than normal, this might pressure down the price of natural gas in the near future.
From the demand standpoint, during last week, the average U.S. natural-gas consumption declined by 4% (week-over-week). The consumption was also 10.5% 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 4.7% and 5.9%, respectively. The residential/commercial sector's consumption was 8.4% lower than last year; the power sector's demand was 25.4% below last year's levels. Finally, the industrial sector's demand slightly declined by 1.3%, week over week. In total, the demand for NG fell by 4% compared to last week. The total demand was also 10.4% lower than in 2013. If the total demand continues to decrease, it could pressure down the price of natural gas.
From the Supply standpoint, the gross natural gas production increased by 1.5% during last week; it was also 4.3% higher than the production level last year. Conversely, imports from Canada tumbled down by 14.4% week over week; imports were also 13.2% lower than in 2013. The total U.S. natural gas supply inched up by 0.1% compared to last week. If the supply remains flat, it may keep the price of natural gas elevated.
According to Baker Hughes' recent weekly update, the natural gas rotary rig count slightly fell by 7 rigs to 335 rigs. The rig count is also 20% below the number of rigs recorded in 2013.
Therefore, during last week, the natural gas supply remained nearly unchanged, but the demand fell because of a drop in consumption in the residential/commercial and power sectors. Despite the recent decline in demand, according to the EIA's supply/demand balance, the gap between the supply and demand widened significantly. As long as the demand is above the supply, the price of natural gas could remain elevated.
Weather and natural gas
During last week, U.S. temperatures were warmer than normal. In the next couple of weeks, the current forecasts estimate that temperatures will remain well below normal mainly in the Northeast. This forecast suggests the demand for natural gas in the residential/commercial sector is likely to remain high this week. Moreover, the U.S. heating degrees days are expected to be slightly higher than 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 low storage mainly in the East region, the wider gap between supply and demand, and the expected lower than normal temperatures are likely to keep the price of natural gas higher than normal in the near future. But in the coming weeks the price of natural gas is likely to resume its downward trend.
For further reading see "Is Chesapeake's 2014 Outlook So Grim?"
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.