The price of natural gas moved in an unclear trend during last week. The United States Natural Gas ETF (NYSEARCA:UNG) also didn't do much during last week. According to the recent U.S. Energy Information Administration weekly update, last week's natural gas withdrawal was higher than the five year average but close to last year's withdrawal. Will natural gas resume its downward trend? Let's examine the recent developments in the natural gas market.
During March, the price of Henry Hub (short term delivery) inched up by 0.2%. Furthermore, United States Natural Gas also edged up by a similar rate. As of last week, the Henry Hub price was still $1.53 per million BTUs higher than its price during the same week in 2013. Last week's modest rise in the price of natural gas may have contributed to the slight gain of shares of natural gas related companies such as Devon Energy (NYSE:DVN): During last week, Devon Energy's stock rose by 1.1%. If natural gas price resumes its downward trend, this could reduce Devon Energy's expected sales and its valuation.
The chart below presents the changes of the prices of natural gas and UNG in past several months. Prices are normalized to September 30th, 2013. As you can see, UNG has out-performed natural gas by roughly 10 percentage points due to the Backwardation in the futures market. This recent shift might suggest the market expectations are that the price of natural gas will resume its downward trend in the coming weeks.
According to the EIA weekly report, the underground natural gas storage decreased by 152 Bcf and reached 1,196 Bcf. In comparison, last year the storage declined by 146 Bcf; the five years average withdrawal was 103 Bcf. The current storage for all lower 48 states is 43.2% lower than last year's storage and 38.8% 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.
Last week's extraction rate was much slightly higher than the five year average and last year's. If this week's extraction rate remains higher than normal, this might pressure up the price of natural gas in the coming weeks.
From the demand side, during last week, the average U.S. natural-gas consumption jumped by 24% (week-over-week). The consumption was also 19% above the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the rally as they spiked by 32.1% and 31.7%, respectively. The residential/commercial sector's consumption was 35.2% higher than last year; the power sector's demand was 0.9% above last year's levels. Down the line, however, the high price of natural gas for the season is likely to cut down the demand for this commodity in the power sector. Finally, the industrial sector's demand slightly rose by 3.9%, week over week. In total, the demand for NG hiked by 24% compared to last week. The total demand was also 19% higher than in 2013. If the total demand continues to rally, it could pressure up the price of natural gas.
From the Supply side, the gross natural gas production decreased by 1.3% during last week; it was still 3.7% higher than the production level last year. Conversely, imports from Canada spiked by 11% week over week; imports were also 6.4% higher than in 2013. The total U.S. natural gas supply slipped by 0.5% compared to last week. If the supply continues to come down, it may keep the price of natural gas elevated.
According to Baker Hughes' recent weekly report, the natural gas rotary rig count slightly rose by 10 rigs to 345 rigs. The rig count is still 15% below the number of rigs recorded in 2013.
Therefore, during the previous week, the natural gas supply slipped, but the demand bounced back because of a rise in consumption 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 again. As long as the demand is much higher than the supply, the price of natural gas could remain elevated.
Weather and natural gas
During the previous week, U.S. temperatures were cooler than normal. In the next two weeks, the current projections estimate that temperatures will continue to be well below normal mainly in the Northeast, but higher than normal in most of the West coast. This forecast suggests the demand for natural gas in the residential/commercial sector is likely to remain elevated this week. Furthermore, the U.S. heating degrees days are expected to be higher than normal and last year. Therefore, the lower than normal temperatures in the East are likely to keep the demand for natural gas high in the near future.
The currently higher than normal price of natural gas is likely to come down in the coming weeks. The high price of natural gas could bring the demand for this commodity in the power sector. Moreover, the rise in imports and rig count could also bring down the price of natural gas. But the price could still remain well above the $4 mark as long as the demand for natural gas is expected to rise, the natural gas storage stays much lower than normal, the weekly withdrawal remains higher than the 5-year average, the wide gap between supply and demand persists, and the temperatures continues to be lower than normal.
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.