The natural gas market stagnated as the price of the Henry Hub as well as United States Natural Gas (NYSEARCA:UNG) moved in an unclear trend during last week. Is the recent strong buildup in storage enough to keep drag down natural gas prices? Or will prices remain at their current range in the near term? Let's examine the latest changes in the natural gas market.
Injection to storage remains high
In the past week the buildup to storage was 88 Bcf; the underground natural gas storage was 2,307 Bcf, which was 21.7% below the 5-year average, according the latest EIA weekly update. Last week's injection was still 42 Bcf higher than the 5-year average. Since the start of the buildup season, the total injection was significantly higher than in recent years as indicated in the table below.
Based on the current injection pace, the natural gas storage is expected to come close to 3,700 Bcf by early November - not far off the storage levels of the past couple of years.
In the past few weeks, the higher injection pace coincided with the drop in the average weekly price of natural gas. The chart below shows the shift in current injections from the 5-year average buildups and weekly price of Henry Hub spot price.
The main driving force behind the softening of natural gas market is the drop in demand in the past few weeks. Most of the fall in consumption came from the residential and commercial sectors: During May, these sectors' demand for gas tumbled down by 38%, month over month. These sectors account for 41% of the U.S total natural gas consumption. Despite the drop in consumption in recent months, last week the demand in the residential, commercial and power sectors slightly bounced back. This modest gain, however, didn't lead to a rise in the total demand to exceed the U.S supply. Thus, as long as the demand remains well below the supply, the natural gas market is likely to keep cooling down.
The U.S production is also slowly rising and as of last week, the U.S gross production was over 5% above last year's levels. This is another factor that could bring natural gas supply further up and thus close the gap in the current storage levels from the 5-year average.
The sharp fall in the price of natural gas in the past few weeks is likely to slowdown as prices aren't far off normal levels. For more: Is Liquefied Natural Gas a Buy?
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