Last week's injection to storage was higher than the 5-year average. This development, however, didn't stop the price of natural gas and United States Natural Gas (NYSEARCA:UNG) to recover during last week. Will the ongoing higher than normal injections bring the natural gas storage to the 5-year average level by November? Let's tackle this issue and examine the recent weekly changes in the natural gas market.
Last week, the price of natural gas rose by 3%. Moreover, other natural gas related investments such as Chesapeake Energy (NYSE:CHK) and United States Natural Gas also increased by 3.7% and 3.4%, respectively. Nonetheless, during 2014, UNG has been still outperforming natural gas by over 12 percentage points because of the Backwardation in the futures market.
According to EIA's latest weekly update, the underground natural gas storage expanded by 114 Bcf and reached 1,380 Bcf. In comparison, last year, the storage rose by 88 Bcf; the 5-year average injection was 93 Bcf.
As you can see above, last week's injection was well higher than last year's injection and the 5-year average injection.
Despite this higher injection pace, at the current pace, it seems the natural gas storage will only reach around 3,200 Bcf by November (towards the timing of the next extraction season). The chart below demonstrates this projection.
The chart above shows the progress in the 2014 storage (in blue) and the potential buildup in storage over the next several months (in red strips), assuming the buildup will remain roughly 20% above the 5-year average. The red line is the 5-year average storage.
Based on the chart above, by November 2014, the storage will be roughly 600 Bcf below the 5-year average storage. This lower storage is likely to keep the price of natural gas higher than normal in the coming months.
From the demand standpoint, the average U.S natural gas total demand declined again by 1.1% (week-over-week). Most of the decrease is related to the softer demand in the residential/commercial sector, which was partly offset by the increase in consumption in the power sector.
From the supply standpoint, the gross natural gas supply slightly increased by 0.7% during last week; this gain was mostly due to higher production, which was partly offset by a decline in Canadian imports. According to Baker Hughes' recent weekly report, the natural gas rotary rig count rose by 1 rig to reach 326 rigs.
Therefore, during the previous week, the natural gas demand slightly contracted, while the supply expanded. Despite these developments, the EIA's supply/demand balance remained relatively unchanged with the supply remaining above the demand.
The weather is cooling down
The U.S temperatures were cooler than normal during the previous week. Looking forward to the next couple of weeks, the temperatures are expected to be lower than normal mainly in the Midwest and Northeast. Further, U.S. heating degrees days are projected to be lower than normal. Based on the above, the demand for natural gas in the residential/commercial sector could slightly pick up.
The price of natural gas is likely to resume its downward trend in the coming weeks as production slowly picks up and demand remains below the supply. This week, the demand for natural gas in the residential/commercial sector might pick up due to the expected colder than normal weather. But this development won't have a strong lingering effect on prices.
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.