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Summary

  • The natural gas market including UNG slightly rose last week. Looking forward, natural gas could resume its downward trend.
  • Last week’s injection to storage was much higher than normal, which may have contributed to the plunge of natural gas prices at the end of the week.
  • The low storage levels and stagnate natural gas production could maintain the price of natural gas elevated.

The price of natural gas slightly rose during last week. United States Natural Gas (NYSEARCA:UNG) also increased last week. Based on the recent U.S Energy Information Administration weekly update, the latest weekly natural gas injection was well above the five year average. Will natural gas resume its downward trend? Let's examine the recent changes to the natural gas market.

During last week, the price of Henry Hub (short term delivery) slightly rose by 0.6%. Moreover, United States Natural Gas also increased by 0.66%. As of last week, the Henry Hub price still $0.57 per million BTUs above the price during the same week last year. Last week's modest gain in the price of natural gas may have pulled up shares of natural gas related companies such as Cheniere Energy (NYSEMKT:LNG): During last week, Cheniere Energy's stock increased by 1.3%.

The chart below presents the shifts in the prices of natural gas and UNG during the year (up to date). Prices are normalized to January 31st, 2014. The chart shows that UNG continues to out-perform natural gas by nearly 13 percentage points because of the Backwardation in the futures market.

Source: Google Finance and EIA

Storage

According to the EIA's latest weekly update, the underground natural gas storage rose by 82 Bcf and reached 981 Bcf. In comparison, last year, the storage rose by 43 Bcf; the five years average injection was 62 Bcf. Therefore, last week's injection was higher than normal. The current storage for all lower 48 states is still 44.6% lower than last year's storage and 50% below the 5-years average.

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

Source: EIA

Last week's injection was much higher than last year's and the five year average injection.

Here is another way to look at the recent shifts in the natural gas market. The table below shows the storage at the end of April, the buildup during April, average weekly changes in storage during April, price at the end of March and the end of April, and price change in recent years.

(click to enlarge)

Source: EIA

As you can see, during April 2014, the buildup in the natural gas storage was the highest since 2010. This means, despite the strong buildup, the price of natural gas kept rising during the month, partly due to the current low storage level.

Nonetheless, if the weekly injections keep rising at a higher rate than the 5-year average it could slowly bring down the price of natural gas.

Demand

From the demand side, during the previous week, the average U.S natural-gas consumption inched up by 0.2% (week-over-week). The consumption was also 1.9% above the natural gas consumption recorded during the same week last year. The power sector led the rally as it increased by 7.6%; this sector's consumption was still 1.7% lower than last year. Conversely, the residential/commercial sector declined by 4% during last week; this sector's demand was still 8.8% above last year's levels. Finally, the industrial sector's demand slipped by 1.6%, week over week. In total, the demand for NG edged up by 0.4% compared to last week. Finally, the total demand was 2.3% higher than last year. If the total demand resumes its downward trend, it could drag down the price of natural gas.

Supply

From the Supply side, the gross natural gas production edged down by 0.3% during the previous week; it was still 3.7% higher than the production level last year. On the other hand, imports from Canada increased by 4.8% week over week; imports were 4.9% lower than last year. The total U.S natural gas supply edged up by 0.04% compared to the previous week.

Based on Baker Hughes' recent weekly report, the natural gas rotary rig count remained unchanged at 323 rigs. The rig count is currently 8.8% below the number of rigs recorded in 2013.

Therefore, during last week, the natural gas supply remained nearly unchanged; the demand only inched up. Due to the lack of growth in the demand, according to the EIA's supply/demand balance, the gap between the supply and demand remained nearly unchanged as supply was still higher than the demand. If the gap between supply and demand widens; it could further pressure down the price of natural gas.

The weather keeps heating up

During last week, U.S temperatures heated up again and were higher than normal. Moreover, in the coming weeks, the temperatures are expected to be warmer than normal mainly in the Northeast, and most of the West. Conversely, throughout parts of the Midwest and the South the temperatures are projected to be lower than normal. The U.S heating degrees days are expected to be slightly lower than normal. The potential higher than normal weather in the West and Northeast could bring further down the demand for natural gas in the residential/commercial sector.

Takeaway

The ongoing decline in the demand for natural gas and stable supply is slowly loosening up the natural gas market. Moreover, this looser market translates to higher injections, which could further bring down the price of natural gas. But the currently low natural gas storage keeps the price of natural gas from tumbling down. Therefore, while I remain bearish on natural gas, but it could take a while until the price comes down from its high levels.

Source: Is The Natural Gas Market Bound To Cool Down?