- Last week’s natural gas injection to storage was above the 5-year average.
- The natural gas market including UNG remained relatively flat on a weekly scale.
- The weekly changes in storage seem to explain 8% of the volatility of natural gas prices.
The natural gas market remained stagnant as the price of natural gas and United States Natural Gas (NYSEARCA:UNG) remained relatively unchanged on a weekly scale. According to the U.S. Energy Information Administration, the recent natural gas injection was above the five-year average. Does the gap between the recent injection and the five-year average injection affect the weekly price of natural gas? Also, will natural gas break free from its current stagnation? Let's examine these issues.
Last week, the price of natural gas inched down by 0.2%. Moreover, other natural gas related investments such as United States Natural Gas also edged down by 0.3%. Nonetheless, during the year, UNG is still out-performing natural gas by around 11 percentage points due to the Backwardation in the futures market.
According to EIA's recent weekly report, the underground natural gas storage expanded by 106 Bcf and reached 1,266 Bcf. In comparison, last year, the storage rose by 89 Bcf; the five years average injection was 90 Bcf.
The table above shows that last week's injection was above last year's injection and the five-year average injection. Another way to look at the recent changes in the natural gas storage is to examine the changes in price of natural gas (weekly averages) and the gap between the recent storage changes and the 5-year average storage changes. The chart below does so.
As you can see, in recent weeks the injections to storage were mostly only slightly higher than the five-year average, which could partly explain the stagnation in the price of natural gas in recent weeks. Conversely, back in January and February, when the extractions were much higher than the five-year average, the price of natural gas rallied to over $6. But how much of the movement in the price of natural gas, the changes in storage explain?
In the chart below, are the difference between 5-year average and weekly changes in storage (on the x-grid); and the weekly change in the price of natural gas (on the y-grid).
The chart shows, on a weekly scale, the shift in storage from 5-year average plays a small but significant factor in determining the weekly changes in the price of natural gas. Specifically, this very simple regression, under certain assumptions (that might not hold up upon further investigation - more on that in a future post), shows that the changes in storage compared to the 5-year average explains nearly 8% of the total movement of natural gas prices. Moreover, the coefficient came out significant (5% significance level). This means, based on this simple model, for every access injection of 10 Bcf over the 5-year average, the weekly price of natural gas, on average, will fall by 0.4%. This rudimentary model goes to show that while the changes in storage play a significant role in determining the weekly changes in the price of natural gas, they only explain 8% of the total movement of prices. Let's turn to examine the weekly changes in the natural gas market:
From the demand side, the average U.S. natural-gas total demand dropped by 0.8% (week-over-week). Most of the fall is related to the lower power sector demand, which offset the rise in residential/commercial sector.
From the Supply side, the gross natural gas supply inched down by 0.3% during last week; this fall was mostly due to lower production, which offset the rise in Canadian imports. According to Baker Hughes' recent weekly update, the natural gas rotary rig count slipped by 1 rig to reach 325 rigs.
Therefore, during last week, both the natural gas supply and demand slightly contracted. Due to the little changes in supply and demand, the EIA's supply/demand balance remained relatively flat with the supply remaining higher than the demand.
The weather factor
Last week, the U.S. temperatures were warmer than normal. In the coming weeks, the temperatures are projected to be warmer than normal in most parts of the U.S. including the West and Northeast. Moreover, U.S. heating degrees days are expected to be slightly lower than normal. Based on the above, the demand for natural gas in the residential/commercial sector is likely to fall.
The price of natural gas is likely to slowly descend towards the $4 mark. Nonetheless, the fall of natural gas prices could further increase the demand for this commodity in the power sector. Finally, if the injections don't pick up to substantially exceed the 5-year average injections, the natural gas price will continue to only slowly fall. I remain bearish on natural gas. For more: Is Chesapeake's Outlook So Grim?