During last week, natural gas prices changed direction and tumbled as the future price (short term delivery) declined by 4.6%; the spot price, by 5.2%. There were many "running theories" for the recent shift in the direction of natural gas: an update in the weather forecast, a shift in the Contango/Backwardation of natural gas prices, a long squeeze. But the main question remains: will natural gas prices continue their downward trend? Let's examine the recent changes in natural gas markets to try and answer this question.
During last week the price of Henry Hub (spot) fell by 5.18%; the future price (short term delivery) also decreased by 4.64%; United States Natural Gas (UNG) price decreased by 4.6%. The upcoming expiry of short term futures might bring down natural gas prices in the last couple of days of the month.
Warmer than Normal Weather Continues to Subside
The weather is still warmer than normal but was less hot than in recent weeks. Further, there are some reports that project the hot weather will continue to subside in the weeks to follow. This might imply there will be a decline in natural gas consumption in the power sector. During last week the U.S temperatures (on a national level) were higher by 2.6 degrees than the 30-year normal temperature but 1.9 degrees cooler than the same week in 2011. The hotter than normal weather helped keep the demand for natural gas robust in recent weeks.
According to the EIA, the average U.S NG consumption has decreased by 2% during last week. The power sector led the drop with a 3.4% fall (week over week). Other sectors' demand for NG also declined during last week. The total demand for NG decreased by 2% compared with the previous week's levels; it was still 2.4% above the demand during the parallel week in 2011. Thus, the demand slightly declined compared to the previous week.
From the Supply side, the gross natural gas production slipped by 0.1% during last week; it was 3.2% above the production level in 2011. Imports from Canada decreased by 1.9% (week-over-week); the imports were 7.5% below the imports recorded during the same week a year back. The total U.S natural gas supply declined on a weekly scale by 0.3%. Finally, the natural gas rotary rig count decreased by 13 and settled at 505 rigs. Therefore, the NG supply edged down during last week.
So the supply and demand moderately declined during last week; the supply declined by a lower rate than the demand did. Thus, the natural gas market has loosened a bit compared to its state a week earlier.
Natural gas prices tend to rise during the June and July: the Henry Hub rose by 6% during the first three of weeks of July 2011; natural gas prices rose by nearly 9.5% during July 2009. This pattern, however, isn't consistent. But there is a consistency in the decline of natural gas prices during August: in the past five years the Henry Hub declined during this month. If this pattern will continue this year, it could suggest natural gas prices will continue to fall.
Natural gas injection to the underground natural gas storage was lower than the injection during the parallel week in 2011 by nearly 16 Bcf. Further the injection was also 28 Bcf lower than the 5-year average injection. The current storage is at 3,217 Bcf for all lower 48 states, which is still nearly 14.5% 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 around late October to reach 3,600. But keep in mind that this estimate could be undervalued: If the upcoming winter will start late as it did last year, if the winter will be warmer than normal, if the injections will start to pick up in the months to come, then this could result in a higher and later storage peak than the one I have estimated.
The table below presents the 5 year average injections, storage and estimated injections and storage in the weeks to come.
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 and should be taken with a grain of salt. This estimate doesn't consider the above-mentioned reservations.
So what does it mean for the natural gas market?
Based on the recent developments in the natural gas demand and supply, it seems the natural gas market has gotten a bit looser. The warmer than normal weather slightly subsided. There could be a seasonally effect that will pressure down natural gas prices. On the other hand, the natural gas rig count continued to dwindle. The demand for natural gas could pick up if the warmer than normal weather will continue.
Based on the above, I guess natural gas may continue to decline as long as the market gets looser and the warmer than normal weather further subsides. Nonetheless, there could be surprises that will keep natural gas prices at their current level: if the supply for natural gas will decline, or the storage injection will be much lower than expected, or the weather will become warmer.
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.