Will Natural Gas Continue To Rally?

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 |  Includes: CHK, UNG
by: Lior Cohen

During last week, natural gas prices rallied after they had declined during most of August. Natural gas prices rose despite the hike in natural gas injection - the highest injection since June 2012. On the other hand, the decline in production may have contributed to the recovery of natural gas rates. Hurricane Isaac didn't seem to cause any significant damage to natural gas and oil facilities. There are reports that energy companies resumed their oil and gas production at the Gulf of Mexico. This could imply that the natural gas production will rally in the weeks to follow. Let's examine the recent changes in natural gas market to figure what is up ahead for natural gas.

During last week, the price of Henry Hub (spot) declined by 1.8%; on the other hand, the future price (short-term delivery) rose by 3.7%; United States Natural Gas (NYSEARCA:UNG) price also increased by 2.4%. Despite the recent rise of price of natural gas, it didn't seem to have much of an effect on the stocks of natural gas and oil producer such as Chesapeake Energy Corporation (NYSE:CHK). During last week, the shares of the company declined by 0.2%.

The chart below shows the recent recovery of the Henry Hub future (short term delivery) prices during the last week of August.

(click to enlarge)Click to enlarge

Supply

From the Supply side, the gross natural gas production declined by 3.3% during last week; it was also 0.8% below the production level in 2011. Imports from Canada, on the other hand, increased by 1.6% (week-over-week); the imports were 0.7% below the imports recorded during the parallel week in 2011. The total U.S natural gas supply declined on a weekly scale by 2.84%. Finally, the natural gas rotary rig count slightly rose by 2 and settled at 486 rigs. Therefore, the NG supply contracted during last week.

Storage

Natural gas injection to the underground natural gas storage was 66 Bcf, which was higher than the injection during the parallel week in 2011 - it was back then at 55 Bcf. Further, the injection was also 2 Bcf higher than the 5-year average injection. This was the first time for this season that the current injection was higher than the injection in the previous years. The current storage is at 3,374 Bcf for all lower 48 states, which is nearly 12% above the 5-year average. The difference between the current storage levels and 5-year average storage may start to expand if the future injections will continue to exceed the injection in past years; the weather will continue to play a role in the future injections. If the weather will continue to get cooler than normal and there won't be any future storms to jeopardize the natural gas production then the gap could start to expand.

Demand

According to the EIA, during last week, the average U.S. NG consumption rose 0.6%. The power sector led the rise with a 3.6% gain (week over week). Alternatively, the residential/commercial sector's demand declined by 7.4% (week over week). The total demand for NG increased by 0.6% compared with the previous week's levels; it was also 2.6% above the demand during the parallel week in 2011.

So the natural gas supply declined, while the demand rose during last week. Thus, the natural gas market has tightened compared to its condition a week earlier.

Hurricane Season Will Continue to Threaten Production

The weather was cooler than normal: During last week, the U.S. temperatures (on a national level) were lower by 1.3 degrees than the 30-year normal temperature and 3.4 degrees lower than the same week in 2011. As the temperature continues to fall, the demand in the residential/commercial sector, as seen above, continues to dwindle compared to recent weeks. There are still causes for concerns in regards to the effects the Hurricane Season could have on the production of natural gas. If there aren't any tropical storms or Hurricanes that could impede natural gas production or damage infrastructure, then it won't affect much the natural gas market.

So what's the bottom line for the natural gas market?

Based on the recent changes in the natural gas demand and supply, it seems the natural gas market is tightening. However, this could have been just a matter of a short-term shift due to, among other factors, Hurricane Isaac - mainly because it could have adversely affected production. Further, the rise in injection to NG storage could imply a shift that will result in an ongoing higher than normal storage level. If the production starts to pick up in the near future, if the weather remains cooler than normal, and if the natural gas injection remains higher than in recent years, then I guess natural gas prices will resume their downward trend.

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. 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.