Natural gas rallied during last week. United States Natural Gas (NYSEARCA:UNG) also rose during last week. According to the latest U.S Energy Information Administration weekly update, last week's natural gas extraction was higher than the five year average but much lower than last year's extraction. Will natural gas continue to recover? Let's analyze the recent developments in the natural gas market.
During last week, the price of Henry Hub (short term delivery) rose by 4%. Furthermore, United States Natural Gas also increased by 4.25%. Furthermore, as of last week, the Henry Hub price also $0.38 per million BTUs higher than its price during the same week in 2013. Last week's rally in the price of natural gas may have contributed to the slight recovery of shares of some natural gas producers including Devon Energy (NYSE:DVN): During last week, Devon Energy's stock rose by 2.7%. If natural gas price continues to rise, this could increase Devon Energy's valuation.
The chart below shows the changes in the prices of natural gas and UNG in past several months. Prices are normalized to November 29th, 2013. The chart presents that UNG has out-performed natural gas by roughly 17.1 percentage points due to the Backwardation in the futures market. This situation implies the market expectations are that the price of natural gas may descent in the coming months.
Based on EIA's latest weekly update, the underground natural gas storage dropped by 57 Bcf and reached 896 Bcf - the lowest level in over a decade. In comparison, last year the storage declined by 95 Bcf; the five years average withdrawal was 2 Bcf. The current storage for all lower 48 states is 50.1% lower than last year's storage and 50.8% below the 5-years average.
The table below shows the changes in storage and weekly prices in the past several months. 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 but much lower than last year's. If this week's withdrawal remains above normal, this might keep the price of natural gas high.
From the demand standpoint, during the previous week, the average U.S natural-gas consumption rose by 1.8% (week-over-week). The consumption was still 5.6% below the natural gas consumption recorded during the same week in 2013. The power and residential/commercial sectors led the charge as they rose by 5.5% and 1.4%, respectively. The residential/commercial sector's consumption was still 6.4% lower than last year; the power sector's demand was 9.7% below last year's levels. If the price of natural gas remains elevated, it could reduce further its demand in the power sector. Finally, the industrial sector's demand slightly declined by 0.3%, week over week. In total, the demand for NG slightly rose by 1.9% compared to last week. Conversely, the total demand was 5.5% lower than in 2013. If the total demand continues to pick up further, it could pull up the price of natural gas.
From the Supply standpoint, the gross natural gas production edged up again by 0.4% during last week; it was also 4.5% higher than the production level last year. On the other hand, imports from Canada dropped by 6.2% week over week; imports were also 16% lower than in 2013. The total U.S natural gas supply inched down by 0.2% compared to last week. If the supply remains stable, it may pressure up the price of natural gas.
According to Baker Hughes' recent weekly report, the natural gas rotary rig count decreased by 8 rig to 318 rigs. The rig count is also 18% below the number of rigs recorded in 2013.
Therefore, during the previous week, the natural gas supply remained stable, while the demand slightly rallied. Due to the recent recovery of the demand, according to the EIA's supply/demand balance, the gap between the supply and demand has slightly widened. If the gap continues to expand, it could pull up the price of natural gas.
Weather and natural gas
During last week, U.S temperatures were cooler than normal. In the next two weeks, the temperatures are projected to be lower than normal weather throughout the East coast mainly in the Northeast and parts of the Midwest. Conversely, the U.S heating degrees days are projected to be higher than normal. Nonetheless, the ongoing lower than normal temperatures mostly in the East is likely to maintain the elevated demand for natural gas in the in the residential/commercial sector this week.
The lower than normal temperatures in the Northeast and parts of the Midwest are likely to keep the demand for natural gas high. Moreover, the stagnant supply, low storage level and ongoing higher than normal withdrawal rate are likely to keep natural gas at its current high level for the season. Finally, the current rise in gap between supply and demand is likely pressure up the price of natural gas.
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.