The natural gas market continues to lose steam as its price slowly declined during last week. United States Natural Gas (NYSEARCA:UNG) also fell last week. According to the latest U.S Energy Information Administration weekly update, last week's natural gas injection was slightly higher than the five year average. Will natural gas keep falling? Let's analyze the recent developments in the natural gas market.
During the previous week, the price of Henry Hub (short term delivery) fell by 2%. Moreover, United States Natural Gas also decreased by 1.8%. As of last week, the Henry Hub price still $0.41 per million BTUs above the price during the same week in 2013. Last week's fall in the price of natural gas may have curbed down the rally of shares of natural gas related companies such as Chesapeake Energy (NYSE:CHK): During last week, Chesapeake Energy's stock rose by 2.2%.
The chart below presents the developments in the prices of natural gas and UNG during the year (up to date). Prices are normalized to December 31st, 2013. The chart shows that UNG continues to out-perform natural gas by almost 15 percentage points because of the Backwardation in the futures market.
Based on the EIA's recent weekly update, the underground natural gas storage increased by 49 Bcf and reached 899 Bcf. In comparison, last year, the storage rose by 30 Bcf; the five years average injection was 43 Bcf. Thus, last week's injection was slightly higher than normal. The current storage for all lower 48 states is still 48% lower than last year's storage and 52.9% below the 5-years average.
The table below shows the developments in storage and weekly prices in recent months. The table also shows the changes in storage levels during last year and the five year average.
Last week's injection was above last year's and the five year average injection.
Here is another way to look at the recent changes in the natural gas market. The chart below shows the changes in storage and the weekly price of natural gas in the past several years.
As you can see, the natural gas storage is very low. This low level contributed to the jump in natural gas prices (among other factors that pushed natural gas prices to such high levels).
If during this week the storage rises again by a higher than normal pace (5-year average), this might drag further down the price of natural gas.
From the demand standpoint, during last week, the average U.S natural-gas consumption slipped again by 3.1% (week-over-week). The consumption was also 6% below the natural gas consumption recorded during the same week last year. The power sector led the descent as it fell by 5.6%; this sector's consumption was also 9.6% lower than last year. Further, the residential/commercial sector also declined by 3.9% during last year; this sector's demand was still 8.3% below last year's levels. Finally, the industrial sector's demand inched up by 0.1%, week over week. In total, the demand for NG dropped by 3.2% compared to last week. Moreover, the total demand was 5.5% lower than last year. If the total demand keeps declining, it could pressure down the price of natural gas.
From the Supply standpoint, the gross natural gas production inched down by 0.2% during last week; it was still 4% higher than the production level last year. Conversely, imports from Canada rose by 5.5% week over week; imports were 14.6% lower than last year. The total U.S natural gas supply edged up by 0.1% compared to last week.
Based on Baker Hughes' latest weekly update, the natural gas rotary rig count increased again by 7 rigs to 323 rigs. The rig count is still 11.7% below the number of rigs recorded in 2013.
Therefore, during the previous week, the natural gas supply remained virtually flat, while the demand slightly fell. Due to the weaker demand, based on the EIA's supply/demand balance, the gap between the supply and demand widened as supply was higher than the demand. If the gap between supply and demand widens again; it could bring down the price of natural gas.
The weather is getting warmer
During the previous week, U.S temperatures were warmer than normal. Nonetheless, in the following weeks, the temperatures are projected to be colder than normal mainly in the Midwest, Northeast, and parts of the South. Conversely, throughout most of the West the temperatures are expected to be higher than normal. Further, the U.S heating degrees days are projected to much lower than normal. The potential lower than normal weather in the Midwest and Northeast increase the demand for natural gas for heating purposes in those regions. On a national level, the low heating degrees days and warmer than normal weather throughout the West could bring further down the total demand for natural gas in the residential/commercial sector.
The current low storage level and potential lower than normal in certain parts in the U.S could keep the price of natural gas elevated. Nonetheless, the looser natural gas market, the higher injections to storage, the warmer weather in most of the U.S are likely to slowly bring down the price of natural gas to below $4.5 in the coming weeks.
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.