The natural gas resumed its rally during the previous week mainly on Thursday following the release of the U.S Energy Information Administration weekly report. According to the report, last week's natural gas injection was below the five year average. As a result, the price of natural gas and United States Natural Gas (NYSEARCA:UNG) rallied. Let's review the recent developments in the natural gas market.
During last week, the price of Henry Hub (short-term delivery) rose by 2.6%. Further, United States Natural Gas also increased by 2.2%. As of last week, the Henry Hub price was also $0.38 per million BTUs above the price during the same week in 2013. Last week's increase in the price of natural gas wasn't enough to pull back up the shares of natural gas related companies such as Cheniere Energy (NYSEMKT:LNG): During last week, Cheniere Energy's stock declined by 1.2%.
The chart below shows the shifts in the prices of natural gas and UNG during 2014 (up to date). Prices are normalized to December 31st, 2013. The chart shows that UNG has out-performed natural gas by roughly 15 percentage points due to the Backwardation in the futures market. This implies the market expects the price of natural gas may fall in the coming months.
Based on the EIA's recent weekly report, the underground natural gas storage rose by 24 Bcf and reached 850 Bcf. In comparison, in 2013, the storage rose by 31 Bcf; the five years' average injection was 42 Bcf. This means, last week's injection was lower than normal. The current storage for all lower 48 states is still 50% lower than last year's storage and 54.3% below the 5-years' average.
The table below presents the shifts in storage and weekly rates in recent months. The table also shows the developments in storage levels during last year and the five year average.
Last week's injection was below last year's and the five year average injection.
Here is another way to look at the recent developments in the natural gas market. The table below shows the changes in storage, storage levels at the end of March and changes in prices (average weekly prices) during the first half of April of the past seven years.
As you can see, the current storage level is at its lowest. Moreover, the injection rate is slightly below average (seven year average). Usually, when the injection rate is higher than average (say over 15-20 Bcf), the price of natural gas tends to fall during the first half of April (2008 was an exception). This time, while the injection rate was only slightly lower than average, the natural gas storage was well below 1,000 Bcf; this was enough to keep pulling up the price of natural gas.
If this week the storage increases again by a lower than normal pace (5- year average), this might keep the price of natural gas elevated.
From the demand side, during last week, the average U.S natural-gas consumption decreased again by 3.9% (week-over-week). The consumption was also 3.5% below the natural gas consumption recorded during the same week last year. The residential/commercial sector led the fall as it declined by 10.5%; this sector's consumption was also 4.9% lower than last year. On the other hand, the power sector slightly rose by 3.1% during last year; this sector's demand was still 6% below last year's levels. Finally, the industrial sector's demand decreased by 1.8%, week over week. In total, the demand for NG declined by 3.7% compared to last week. Moreover, the total demand was 3.2% lower than in 2013. If the total demand keeps falling, it could bring down the price of natural gas.
From the Supply side, the gross natural gas production inched up by 0.3% during last week; it was also 4.8% higher than the production level last year. Conversely, imports from Canada fell by 1.6% week over week; imports were also 14.8% lower than last year. The total U.S natural gas supply edged up by 0.2% compared to last week.
According to Baker Hughes' recent weekly update, the natural gas rotary rig count rose by 7 rigs to 316 rigs. The rig count is still 16.8% below the number of rigs recorded in 2013.
Therefore, during last week, the natural gas supply remained nearly unchanged, while the demand slightly declined. Despite the weaker demand, according to the EIA's supply/demand balance, the difference between the supply and demand changed direction as demand picked up and was higher than the supply. If the gap between supply and demand changes direction (so that the supply will be higher than the demand); this shift could cut the price of natural gas.
Weather remains warm
During last week, U.S temperatures remained warmer than normal. Furthermore, in the coming weeks, the temperatures are expected to be warmer than normal in the central parts of U.S; in certain parts of the Northeast and west regions the temperatures are projected to be slightly lower than normal. Nonetheless, the U.S heating degrees days are expected to be close to normal. The expected warmer-than-normal weather in many parts of U.S is likely to bring down the demand for natural gas for heating purposes in the following days.
The ongoing lower than normal injection rate and very low storage keeps the price of natural gas above the $4.5 mark. Moreover, even if the demand for natural gas keeps falling and the injection pace picks up, natural gas is likely to remain well over the $4 mark in the coming weeks. But the ongoing loosening of natural gas market is likely to bring slowly down the price of natural gas by the end of the month, especially if the weather heats up and the power sector cuts down its demand 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.