The price of natural gas changed course and fell during last week. United States Natural Gas (NYSEARCA:UNG) also plummeted during the previous week. According to the latest U.S Energy Information Administration weekly update, last week's natural gas extraction was much higher than the five year average and last year's withdrawal. Will natural gas continue to trade down? Let's analyze the recent developments in the natural gas market.
During this month, the price of Henry Hub (short term delivery) dropped by 4%. Moreover, United States Natural Gas also tumbled down by a similar pace. Nonetheless, as of last week, the Henry Hub price was still $2.5 per million BTUs higher than its price during the same week in 2013. Last week's plunge in the price of natural gas may have contributed to the slight fall of shares of natural gas related companies such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake Energy's stock decreased by 3.1%. If natural gas price continued to fall, this could cut Chesapeake Energy's expected sales and its valuation.
The chart below presents the shifts in 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 because of the Backwardation in the futures market. This recent current situation might suggest the market expectations are that the price of natural gas will decline further in the coming weeks.
Based on the EIA weekly update, the underground natural gas storage decreased by 195 Bcf and reached 1,001 Bcf - the lowest level since May 2003. In comparison, last year the storage dropped by 145 Bcf; the five years average withdrawal was 98 Bcf. The current storage for all lower 48 states is 48.9% lower than last year's storage and 46.2% below the 5-years average.
The table below shows the changes in storage and weekly prices in the past several weeks. The table also presents the shifts in storage levels during last year and the five year average.
Last week's withdrawal was higher than the five year average and last year's. If this week's withdrawal remains higher than normal, this might pull back up the price of natural gas in the coming weeks.
From the demand standpoint, during the previous week, the average U.S natural-gas consumption changed course and tumbled down by 27% (week-over-week). The consumption was also 3.5% below the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the rally as they dropped by 36.4% and 23.2%, respectively. The residential/commercial sector's consumption was 1% lower than last year; the power sector's demand was 14% below last year's levels. If the price of natural gas remains at its currently high level, it could reduce further the demand for this commodity in the power sector. Finally, the industrial sector's demand slightly fell by 5.6%, week over week. In total, the demand for NG plunged by 26% compared to last week. The total demand was also 3.2% lower than in 2013. If the total demand continues to fall, it could pressure down the price of natural gas.
From the Supply standpoint, the gross natural gas production rose by 0.9% during last week; it was also 4.2% higher than the production level last year. Conversely, imports from Canada dropped by 13% week over week; imports were also 10.5% lower than in 2013. The total U.S natural gas supply inched down by 0.3% compared to last week. If the supply continues to slowly fall, it may keep the price of natural gas elevated.
According to Baker Hughes' recent weekly report, the natural gas rotary rig count slipped by 1 rig to 344 rigs. The rig count is still 20% below the number of rigs recorded in 2013.
Therefore, during last week, the natural gas supply inched down, but the demand plummeted because of a drop in consumption in the residential/commercial and power sectors. Following the recent decline in demand, according to the EIA's supply/demand balance, the gap between the supply and demand narrowed. If the gap continues to close, it could pressure down the price of natural gas.
Weather and natural gas
During last week, U.S temperatures were much lower than normal. In the next couple of weeks, the temperatures are expected to remain well below normal throughout the Northeast, but higher than normal in the West coast. Conversely, the U.S heating degrees days are expected to be slightly lower than normal and last year. Thus, despite the lower normal temperatures in the Northeast, the total demand for heating in the residential/commercial sector might not increase this week.
The currently elevated price of natural gas is likely to further reduce the demand for natural gas in the power sector. This, in turn, is likely to bring down the price of natural gas from its high level. Further, the narrow gap between supply and demand, and expected low heating degrees could also pressure down the price of natural gas. Conversely, the ongoing colder than normal weather in the Northeast, low storage level and slight drop in natural gas imports could keep the price of natural gas above the $4 mark.
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.