Does The Summer Weather Impact The Natural Gas Market?

Jul. 7.14 | About: The United (UNG)


Last week’s natural gas injection to storage was above the 5-year average.

Does the weather impact the natural gas storage during the summer?

The Backwardation in the natural gas market is slowly closing.

The natural gas market remained relatively calm in the past week as the price of natural gas continued to range between $4.4 and $4.5. In the past eight weeks, the injections to storage were higher than normal, but the price of natural gas remains elevated. Will the high injection to storage eventually bring down the price of natural gas? Also, do the changes in temperatures also impact the pace of buildup into storage during the injection season?

During the previous week, the price of natural gas inched down by 0.07%. Further, other natural gas related investments such as United States Natural Gas (NYSEARCA:UNG) and Chesapeake Energy (NYSE:CHK) declined by 1.2% and 2.9%, respectively.

The sharper fall in UNG compared to the price of natural gas led to a slight contraction in the difference between the two, as demonstrated in the chart below. Nonetheless, the ongoing Backwardation in the futures market keeps the gap between UNG and natural gas close to 10%.

Source of data: EIA and Google finance

According the recent EIA weekly update, last week's injection to storage was 100 Bcf; the underground natural gas storage was 1,929 Bcf - around 31% below the 5-year average. Last week's injection was 32 Bcf or 47% higher than the 5-year average.

Despite the steady high injections levels, the weekly price of natural gas remains around the $4.5 price mark as indicated in the chart below.

Source of data: EIA

Summer weather and natural gas

It's no surprise to see a relationship between the changes in temperatures and the demand for natural gas during winter time: As the weather gets colder than normal, the demand for heating with natural gas rises - straight forward.

But there tends to be a strong relation between the temperatures and changes in the natural gas storage during the summer time as well, as indicated in the chart below.

Click to enlarge

Source of data: EIA

The chart above shows a very basic regression of the gap between the current injection and 5-year average injection and the U.S mean temperature anomaly (i.e. the difference between the current temperature and the weekly normal temperature during a given week).

As you can see, the chart shows a negative and strong linear relation (under certain assumptions) during last year's injection season with an R square of 29% (this regression uses only 25 observations, so the results should be taken as a rough estimate and with a grain of salt).

This means, as the weather gets hotter the injections tend to fall below normal.

Nonetheless, as I have showed in a previous article, the impact of the changes in the weekly storage of natural gas is significant but not too strong. During the summer, this impact is likely to be even less strong.

In conclusion…

The price of natural gas is likely to slowly come down from its high level as long as the injection to storage remains higher than normal. But natural gas is likely to remain higher than normal in the near term.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.