Will The Cold Weather Heat Up The Natural Gas Market?

Includes: UNG
by: Lior Cohen


Has the cold weather in the U.S. pushed up the demand for natural gas?

What's impacting the direction of natural gas prices?

Despite the cold weather, natural gas storage is still higher than normal.

After forecasts predicated a mild winter, the cold weather has finally struck the U.S. and, in some areas, the blizzards reached record proportions. Despite the belated cold fronts and massive snowfalls across the eastern portion of the U.S., the price of natural gas hasn't picked up. And shares of United States Natural Gas (NYSEARCA:UNG) are still down by over 8% since the beginning of the year. Will the recent blizzard boost sales of natural gas and drive up UNG and natural gas prices?

How Cold Is It?

Recent major snowfalls made the headlines, but it's important to focus on the weather forecasts going forward. Based on the recent National Weather Service forecasts, temperatures are still expected to be higher than normal over the next couple of weeks -- mostly in the East and Midwest. And the heating degree days are still expected to remain lower than normal and last year. So, the forecasts haven't changed much and we still estimate that the weather will be warmer than normal. Even so, the markets expect the price of natural gas to start moving up, as indicated in the futures markets.

Click to enlarge

Source: EIA.

The contango has dropped from the higher levels recorded in mid-December. Back then, the contango eroded the price of UNG due to roll decay. As an example, over the last couple of months the price of UNG fell by 10% while natural gas prices fell by 5%. If the contango for the coming months keeps rising, be sure that the roll decay won't diminish. So the market expects higher prices in the next several months, and the weather -- while it did cool down -- isn't expected to be much colder than normal in the near term.

Another major question is where the storage levels are heading. As of last week, the extraction from storage reached 178 Bcf, which was a bit higher than the five-year average. And over the next few weeks analysts estimate the withdrawal from storage won't be far off the five-year extraction for this time of the year. But if the withdrawals remain even slightly lower than normal (say, 5% lower) over the rest of the extraction season -- until the end of March -- then storage could reach a little under 2,200 Bcf, which is close to 550 Bcf higher than the five-year average.

Click to enlarge

Source: EIA and author calculations.

The EIA expects the storage will be 2,043 Bcf by the end of March, which is 38% higher than the level recorded last year. In any case, if the storage remains on a higher trajectory than in previous years, the price of natural gas isn't likely to rise much higher than its current level.

Bottom Line

The colder weather could boost demand for natural gas, which is still down for the year. This, in turn, might start to push the price of natural gas back up. But as long as the near-term forecasts are for higher-than-normal temperatures and storage remains well above the five-year average, the price of natural gas will remain very low for this time of the year. (For more, please see "Has The Weakness In Oil Fueled The Decline Of UNG?")

Disclosure: I/we 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.