Natural gas bounced back last week. United States Natural Gas (NYSEARCA:UNG) also recovered. According to the latest U.S Energy Information Administration weekly update, last week's natural gas injection was the first one in twenty weeks, yet it was still below the five-year average injection. Will natural gas keep heating up? Let's analyze the recent changes in the natural gas market.
Last week, the price of Henry Hub (short-term delivery) bounced back by 4.1%. Moreover, United States Natural Gas also increased by 4.25%. As of last week, the Henry Hub price also was $0.32 per million BTUs higher than its price during the same week last year. Last week's rise in the price of natural gas may have contributed to the modest recovery of shares of some natural gas companies including Cheniere Energy (NYSEMKT:LNG). Last week, Cheniere Energy's stock rose by 2.1%.
The chart below shows changes in the prices of natural gas and UNG for the past several months. Prices are normalized to November 29th, 2013. The chart presents that UNG has outperformed natural gas by roughly 17.6 percentage points because of the Backwardation in the futures market. This current situation implies the market expectations are that the price of natural gas may tumble in the following months.
According to EIA's latest weekly update, underground natural gas storage modestly increased by 4 Bcf and reached 826 Bcf. In comparison, last year storage declined by 14 Bcf. The five-year average injection was 15 Bcf. The current storage for all lower 48 states is still 50.6% lower than last year's storage and 54.7% below the five-year average.
The table below shows the changes in storage and weekly rates in recent months. The table also shows the shifts in storage levels during last year and the five-year average.
Last week's injection was below the five-year average. If this week the storage rises by a higher than normal pace, this might pressure the price of natural gas.
From the demand standpoint, during the previous week, average U.S natural gas consumption decreased by 4.1% (week-over-week). The consumption was also 0.8% below natural gas consumption recorded during the same week last year. The residential/commercial sector led the charge as it dropped by 10.8%; this sector's consumption was also 6.2% lower than last year. Conversely, the power sector slightly increased by 5.5% during last year. This sector's demand was still 6.2% below last year's levels. If the price of natural gas remains elevated, it could reduce the demand in the power sector. Finally, the industrial sector's demand slipped by 2.4%, week over week. In total, the demand for NG declined by 4.1% compared to last week. Moreover, the total demand was 4% lower than in 2013. If total demand continues to decrease, it could drag down the price of natural gas.
From the supply standpoint, gross natural gas production edged down by 0.1% during last week. It was also 4.2% higher than the production level last year. Conversely, imports from Canada rose by 9.5% week-over-week. Imports were still 9.9% lower than in 2013. The total U.S natural gas supply inched up by 0.4% compared to last week. If the supply remains stable, it may keep the price of natural gas around $4.
According to Baker Hughes' recent weekly update, the natural gas rotary rig count decreased by 6 rigs to 310 rigs. The rig count is also 17.7% below the number of rigs recorded last year.
Therefore, during the previous week, natural gas supply remained stable, while the demand slipped. Due to the weaker demand, according to the EIA's supply/demand balance, the difference between the supply and demand widened so that the supply was higher than the demand. If the gap widens further, it could pressure down the price of natural gas.
Weather and natural gas
During the previous week, U.S temperatures were warmer than normal. In the next couple of weeks, temperatures are projected to be lower than normal mainly in the Northeast and in parts of the Midwest. Conversely, temperatures are expected to remain much higher than normal throughout the West. Nonetheless, U.S heating degrees days are projected to be lower than normal this week. The colder than normal weather in the Midwest and Northeast could maintain high demand for natural gas for heating purposes in the following days.
Last week, the modest injection to storage was enough to pullback up the price of natural gas. Moreover, the expected colder than normal weather mainly in the Northeast could increase the demand for natural gas. But the current high prices for natural gas are likely to come down in the coming weeks. Total demand continues to fall, the supply remains stable and the natural gas market keeps loosening. These developments are likely to bring natural gas prices down to the $4 mark in the coming weeks.
For further reading see "What's Next for 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.