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Summary

  • The natural gas market cooled down again last week as the Henry Hub tumbled down. UNG also fell by a similar rate. Looking forward, natural gas is likely to fall.
  • The elevated price of natural gas is likely to slash the demand for natural gas in the power sector.
  • Nonetheless, the expected lower than normal temperatures, low storage, and higher than normal extraction from storage are likely to keep natural gas above $4.

The natural gas continued to cool down during last week. United States Natural Gas (NYSEARCA:UNG) also tumbled down during the previous week. According to the recent U.S Energy Information Administration weekly report, last week's natural gas withdrawal was higher than the five year average but lower than last year's extraction. Will natural gas keep cooling down? Let's examine the recent changes in the natural gas market.

During March, the price of Henry Hub (short term delivery) declined by 2.5%. Furthermore, United States Natural Gas also slipped by 2%. Nonetheless, as of last week, the Henry Hub price remained $0.6 per million BTUs higher than its price during the same week in 2013. Last week's fall in the price of natural gas may have contributed to the slight descent of shares of some natural gas producers including Chesapeake Energy (NYSE:CHK): During last week, Chesapeake Energy's stock decreased by 1.5%. If natural gas price continued to tumble, this could reduce Chesapeake Energy's valuation.

The chart below presents the developments in the prices of natural gas and UNG in past several months. Prices are normalized to November 29th, 2013. The chart shows that UNG has out-performed natural gas by roughly 16.4 percentage points because of the Backwardation in the futures market. This situation might suggest the market expectations are that the price of natural gas will drop further in the near future.

Source: Google Finance and EIA

Storage

According to the EIA weekly report, the underground natural gas storage declined by 48 Bcf and reached 953 Bcf - the lowest level since May 2003. In comparison, last year the storage fell by 62 Bcf; the five years average withdrawal was 20 Bcf. The current storage for all lower 48 states is 49.4% lower than last year's storage and 47.9% below the 5-years average.

The table below presents the shifts in storage and weekly prices in the past several weeks. The table also shows the changes in storage levels during last year and the five year average.

Source: EIA

Last week's withdrawal was higher than the five year average but much lower than last year's. If this week's withdrawal remains higher than normal, this might keep the price of natural gas elevated.

Demand

From the demand side, during last week, the average U.S natural-gas consumption bounced back and slightly increased by 5.2% (week-over-week). The consumption was also 0.9% above the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the way as they increased by 7.4% and 6.2%, respectively. The residential/commercial sector's consumption was also 4.1% higher than last year; the power sector's demand was 6.2% below last year's levels. If the price of natural gas remains high, it could cut its demand in the power sector. Finally, the industrial sector's demand slightly rose by 0.9%, week over week. In total, the demand for NG increased by 5.3% compared to last week. The total demand was also 0.9% higher than in 2013. If the total demand rises further, it could pressure up the price of natural gas.

Supply

From the Supply side, the gross natural gas production inched up by 0.1% during last week; it was also 4% higher than the production level last year. Moreover, imports from Canada also rose by 4.5% week over week; imports were still 3.7% lower than in 2013. The total U.S natural gas supply inched up by 0.3% compared to last week. If the supply continues to slowly rise, it may pressure down the price of natural gas.

According to Baker Hughes' recent weekly report, the natural gas rotary rig count fell by 18 rig to 326 rigs. The rig count is also 22% below the number of rigs recorded in 2013.

Therefore, during last week, the natural gas supply and demand slightly rose. Despite the recent rally of the demand, according to the EIA's supply/demand balance, the gap between the supply and demand didn't widen. If the gap continues to close, it could drag down the price of natural gas.

Weather and natural gas

During the previous week, U.S temperatures were higher than normal. In the next couple of weeks, the temperatures are expected to reach lower than normal weather throughout the East coast mainly in the Northeast and Midwest. Further, another winter storm is expected to reach later this week the East coast. In parts of the North the temperatures are expected to be lower than normal. Moreover, the U.S heating degrees days are expected to be lower than last year. Thus, due to the lower than normal temperatures in most parts of the U.S, the total demand for heating in the residential/commercial sector is likely to rally this week.

Takeaway

The expected lower than normal temperatures in many parts of the U.S are likely to pressure up the demand for natural gas for heating. Moreover, the fall in rig count, the currently low storage level and higher than normal extraction rate are likely to maintain natural gas above $4. Conversely, the high price of natural gas is likely to cut the demand of this commodity in the power sector. Finally, the narrow gap between supply and demand is likely drag down natural gas closer to $4.

Source: Will Natural Gas Remain Above $4?