The price of natural gas plummeted by 4.3% during the past week. Moreover, other natural gas related assets such as United States Natural Gas (NYUNG) also dropped by 4.3%. Let's consider three questions regarding the recent fall in natural gas prices.
Will the recent plunge in natural gas prices continue?
The EIA projected, earlier this month, the price will remain close to $4.5 until the next heating season. The sharp fall in market prices was sudden and could lead the EIA to revise down its estimates regarding the direction of natural gas prices in the coming months.
One factor that could impact the direction of natural gas prices is the progress in weekly injections to storage: According the latest EIA weekly update, last week's injection to storage was 90 Bcf. The underground natural gas storage was 2,219 Bcf, -23.5% below the 5-year average. Last week's injection was 44 Bcf higher than the 5-year average. In the past several weeks the injections to storage were much higher than normal. If this trend persists, it may further pressure down natural gas prices.
Specifically, the average price of natural gas fell in the past four consecutive weeks.
What is keeping the injections higher than normal?
The supply has increased in the past several weeks mainly due the slowly rising production. The higher natural gas prices may have also steered more gas producers to pick up the pace.
But the big difference (no surprise here) is the drop in consumption. Last week alone, the total demand fell by 3%, mainly due to a drop in consumption in the power sector. The elevated prices of natural gas also pushed utility companies such as FirstEnergy (NYSE:FE) to increase their coal consumption over natural gas.
The ongoing rise in production and the plunge in consumption keeps the injection pace picking up at a faster than normal pace.
Does this mean natural gas storage will reach its normal levels in time for the depletion season - i.e. by the end of October or early November?
The recent high injection pace suggests the storage could reach close to 3,600 Bcf by November, as demonstrated in the chart below.
The chart above presents the progress in the 2014 storage (in blue) and the potential buildup in storage over the coming months (in red strips), assuming the buildup will remain roughly 55% above the 5-year average. This number is based on the average injection pace in the past several weeks, in which the average weekly injection was 55% higher than the 5-year average. The red line is the 5-year average storage.
Therefore, unless the injection to storage reaches a faster pace, the storage won't reach its normal levels by November. This means the price is likely to remain higher than normal, which is close to the $3.5-$3.7 mark.
The price of natural gas is likely to keep slowly coming down, but it isn't likely to fall below the $3.5 in the near term. For more: Is Liquefied Natural Gas a Buy?
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