During the previous week natural gas prices didn't do much as they zigzagged with an unclear trend. Despite the rally in NG during June, they are still lower than in the past: during the same week in 2011 the Henry Hub spot price was nearly $1.46 higher than last week's price. During last week the spot price declined by nearly 2% while the future price (August delivery) rose by 3.2% compared to the previous week. Does this mean natural gas prices have finished their rally and will remain flat or perhaps even decline in the weeks to follow? Let's examine the recent developments in natural gas markets to try and answer this question.
During July (up to date) the price of Henry Hub (spot) rose by 5.11%; the future price for August increased by only 1.77%; United States Natural Gas (UNG) price also edged up by 1.7%. The sharp rally for natural gas came during the second part of June; since June 13th UNG added by 28.6%. This means during the past couple of weeks the prices of natural gas didn't increase much and it appears as if the upward trend has run its course. The recovery of NG may have slightly helped struggling energy companies such as Chesapeake Energy Corporation (CHK), but NG prices are still much low for the season and in general.
The Warm Weather Continues
The weather continues to be hotter than normal. During last week the, the U.S temperatures (on a national level) were higher by 5.1 degrees than the 30-year normal temperature and 2.6 degrees than the same week last year. This hot weather is likely to be among the factors to pull up the demand for natural gas and thus keeping natural gas price rising.
The rise in oil prices during last week and by extension United States Oil (USO) may have also been a contributing factor to the rise in NG prices. During June/July the linear correlation between WTI oil and Nat gas (short term delivery) was 0.69 (daily percent changes), which is strong and positive. This correlation however changes over time so should be taken with a grain of salt. If this correlation will continue to hold up and oil prices will decline it might pull down natural gas prices.
During last week the average U.S NG consumption decreased by 0.95%.
The power sector led the drop with a 2.6% decrease. The total demand for NG was down by 1.05% than the previous week's levels; on the other hand, it was 11.75% above the same week in 2011. This means, the hot weather is keeping the demand higher than last year but the demand slightly declined compared to the previous week.
From the Supply side during last week the gross natural gas production rose by 1.03%; it was 4.58% above the production level in 2011. Imports from Canada also rose by 0.87% (week-over-week); the imports were also 3.7% higher than during the same week in 2011. This means the growing demand is being supplied by growing Canadian imports and local production. During last week, the total U.S natural gas supply increased by 1.09%. Finally, the natural gas rotary rig count increased by 8 and reached 542. This means the NG production slightly expanded during last week.
So the supply slightly expanded while the demand moderately fell during last week. So it means the natural gas market has gotten a bit looser compared to its condition a week earlier.
The recent rise in natural gas prices during the second part of June isn't something new: as I have pointed out in the past, during 2011 the Henry Hub increased by over 10% during the first couple of weeks of June; in 2010 prices increased by nearly 13%; in 2009 natural gas prices rose by nearly 13% in the first three weeks of June.
Natural gas injection to the underground natural gas storage was (again) much lower than the injection during the parallel week in 2011 by nearly 51 Bcf. Further the injection was also 57 Bcf lower than the 5-year average injection. The current storage is at 3,135 Bcf for all lower 48 states, which is still nearly 19% above the 5-year average. This is another contraction in the difference between the current storage levels and 5-year average storage that was a couple of weeks back around 25% above the 5-year average; if the demand will remain robust and the supply will stagnate, the gap between the current levels and the historic levels will further contract. At this rate the storage levels will peak early November at 3,800.
So what does it mean for the near future?
Despite the recent developments in the demand and supply I suspect the natural gas market might further tighten as long as the hotter than normal weather will continue. This could mean natural gas prices will remain at their current level and might even resume their rally. I guess natural gas prices won't rise as they did during late June because the lower than normal injections to the storage don't surprise anyone so they should already be incorporated in the current prices. The recent rally in oil prices may have also contributed to the rise in natural gas prices. If oil prices will change direction and fall it could adversely affect NG prices. Finally, if the temperatures will start to come down to normal levels it might change the direction of natural gas rates and bring then down.
For further reading: Will Natural Gas Hit $3?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.