Last week, natural gas prices didn't move much after they had declined during the previous weeks, despite the increase in the injection to storage and the drop in the temperatures throughout the U.S. On the other hand, the storm season is threatening the natural gas supply. This includes Tropical Storm Isaac, which could cause natural gas prices to rally because it made the production shut down in the Gulf of Mexico. These events raise the uncertainty around the direction of natural gas prices in the near future. Let's examine the recent developments in natural gas markets to try and answer this question.
The price of Henry Hub (spot) rose by 3% during the past week, the future price (short-term delivery) decreased by 0.7%, and United States Natural Gas (UNG) also decreased by 1.8%. The recent movement of natural gas may have contributed to the recent changes in natural gas and oil producer stocks, such as Chesapeake Energy Corporation (CHK).
The chart below shows the recent tumble of the Henry Hub spot and future (short-term delivery) prices during most of August.
Click to enlarge images.
On the supply side, gross natural gas production rose by 0.8% during last week; it was 3.4% above the production level in 2011. Imports from Canada, on the other hand, decreased by 5.8% (week over week); they were 0.5% above the imports recorded during the same week in 2011. The total U.S. natural gas supply edged up on a weekly scale by 0.24%. Finally, the natural gas rotary rig count decreased by 11 and settled at 484 rigs. Therefore, the NG supply slightly expanded during last week.
The natural gas injection to the underground natural gas storage was 47 Bcf, which was still lower than the injection during the parallel week in 2011 -- back then it was at 73 Bcf. Furthermore, the injection was also 9 Bcf lower than the five-year average injection. The current storage is at 3,308 Bcf for all lower 48 states, which is still nearly 12.1% above the five-year average. The difference between the current storage levels and five-year average storage continues to shrink; the weather will continue to be a factor regarding whether the storage difference will nullify. If the weather doesn't get hotter than normal as it did during July, and the storms don't affect natural gas production, then the difference might not nullify.
According to the EIA, during the past week average U.S, NG consumption declined 5.1%. The power sector led the fall, with an 11.05% drop (week over week). Alternatively, many other sectors' demand, such as the residential/commercial sector, rose during last week. The total demand for NG decreased by 5.2% compared with the previous week's levels; it was 5.1% above the demand during the parallel week in 2011.
So natural gas supply edged up, while the demand declined last week. Thus, the natural gas market has loosened a bit compared to its condition a week earlier.
Warm Weather Shifts to Tropical Storms Weather
The weather remains warmer than normal, but is less hot than in July and early August. Last week, temperatures on a national level were higher by 0.7 degrees than the 30-year normal temperature and 0.9 degrees higher than the same week in 2011. As the hotter-than-normal temperature subsides, the demand (as seen above) continues to decline compared to recent years. But there are now causes for concern in regard to the effects the hurricane season could have on the production of natural gas. Most recently the concerns are regarding reports about Tropical Storm Isaac, which caused a shut down in production of natural gas and oil in the Gulf of Mexico. If this storm -- and perhaps others -- impedes production, then this could help rally natural gas prices.
As I have stated in the past, there is a strong seasonality effect during August. This could mean that in the near future, all things being equal, the prices of natural gas prices will continue to dwindle -- or, at best, won't rally during the rest of the week.
So what does it mean for the natural gas market?
Based on the recent shifts in natural gas demand and supply, it seems the natural gas market continued to loosen. The demand for natural fell while the supply edged up, despite the ongoing fall in natural gas rigs; the weather cooled down a bit again and contributed to the fall in demand. On the other hand, the recent weather conditions could cause an impediment in natural gas production, which could in turn result in a rise in natural gas prices. Furthermore, the injections are still below last year and the five-year average injections continue to close the gap between current storage levels and recent years' levels.
The bottom line is that natural gas will likely shift from gains to losses along an unclear trend during the coming weeks, until the uncertainty regarding the effects of Issac become clearer.
For further reading: Will Natural Gas Resume Its Rally?"