During last week, natural gas prices zigzagged with an unclear trend as the future price (August delivery) declined by 1.95% while the spot price rose by 2.32%. Nonetheless, NG prices are still well above the $3 mark. The low injections to NG storage didn't seem to pull up natural gas prices. Will natural gas prices resume their rally this week? Let's examine the recent changes in natural gas markets to try and answer this question.
During July (up to date) the price of Henry Hub (spot) rose by 12.77%; the future price for August also increased by 7.09%; United States Natural Gas (NYSEARCA:UNG) price increased by 7.5%. The upcoming expiry of short term futures might bring down natural gas prices in the last couple of days of the month.
The rise in oil prices during the month and by extension United States Oil (NYSEARCA:USO) may have positively affected not only NG prices, but also NG and oil producers such as Chesapeake Energy Corporation (NYSE:CHK).
During July the linear correlation between WTI oil rate and NG (short term delivery) reached 0.38 (daily percent changes), which is mid-strong and positive. This correlation however varies and should be taken with a grain of salt. If the correlation between oil and NG will change direction and tighten and oil prices will resume their rally, then they might suggest natural gas prices will also resume their upward trend.
Hotter than Normal Weather Eases
The weather is still warmer than normal but was less hot than in recent weeks. During last week the U.S temperatures (on a national level) were higher by 3 degrees than the 30-year normal temperature and 0.9 degrees than the same week in 2011. The hot weather is keeping the demand for natural gas in the power sector robust and thus may also pull up natural gas prices. If the weather will become less warm this could curb the rally of NG prices.
Based on the EIA, the average U.S NG consumption rose by 0.9% during last week. The power sector led with a 2.2% gain (week over week). Other sectors' demand for NG declined during last week. The total demand for NG rose by 1.2% compared with the previous week's levels; it was also 1.4% above the demand during the parallel week in 2011. Thus, the demand slightly rose compared to the previous week.
From the Supply side, the gross natural gas production declined by 0.7% during last week; it was 2.3% above the production level in 2011. Imports from Canada decreased by 6.8% (week-over-week); the imports were also 15.4% below the imports recorded during the same week a year back. The total U.S natural gas supply declined on a weekly scale by 1.2%. Finally, the natural gas rotary rig count fell by 4 and settled at 518 rigs. Therefore, the NG supply fell during last week.
So the supply declined while the demand moderately rose during last week. Thus, the natural gas market has tightened up a bit compared to its state a week earlier.
Natural gas injection to the underground natural gas storage was lower than the injection during the parallel week in 2011 by nearly 26 Bcf. Further the injection was also 33 Bcf lower than the 5-year average injection. The current storage is at 3,189 Bcf for all lower 48 states, which is still nearly 15.8% above the 5-year average. Nonetheless, the difference between the current storage levels and 5-year average storage continues to shrink; at the current rate the gap could nullify mid October.
Furthermore, I guess at this rate the storage levels will peak during late October to reach 3,600.
The table below shows the 5 year average injections, storage and estimated injections and storage in the weeks to follow.
The estimated injections are based on two components:
The 5-year average injections;
Subtracting the average gap between the average 5-year injections and the injections in 2012 of the past several weeks;
This estimate is very crude but offers some ballpark figures for the near future storage levels.
So what does it mean for natural gas market?
On the one hand, based on the recent developments in the demand supply, storage, it seems the natural gas market has gotten a bit tighter. Further the natural gas rig count continued to fall. On the other hand, the warmer than normal weather slightly subsided. Oil prices didn't do much during last week so they have had little effect on natural gas prices. These data point out to a mixed signal for the progress of the natural gas market. The upcoming expiry of the short term futures might adversely affect NG prices; this situation could continue until the beginning of next month.
I guess natural gas may continue to edge up as long as the market gets tighter and the warmer than normal weather continues. Nonetheless, I still don't think the current conditions in the natural gas market will result in another sharp rise in natural gas prices in the near future.
For further reading: Will Natural Gas Resume Its Rally?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.