During last week, natural gas prices resumed their downward trend. Natural gas prices declined despite the drop in natural gas injection and production. According to the EIA, Hurricane Isaac caused a drop in natural gas production of nearly 3.2 Bcf per day in the Gulf of Mexico (GOM). Nonetheless, since GOM represents a small portion of the total U.S production (less than 10%), this means the Hurricane didn't have much of an effect on the natural gas market. Since then, the production has resumed it course. This could imply that the natural gas production might rise in the following weeks. Let's examine the recent changes in natural gas market to and examine what is next for natural gas.
During last week, the price of Henry Hub (spot) fell by 0.4%; further, the future price (short term delivery) declined by 4.3%; United States Natural Gas (NYSEARCA:UNG) price also decreased by 3.7%. Despite the recent fall of price of natural gas, it didn't seem to curb the rally of several natural gas and oil producers' stocks such as Exxon Mobil Corporation (NYSE:XOM). During last week, the shares of the company rose by 3%.
As seen bellow, the price of the Henry Hub future (short term delivery) and spot remained between $2.9 and $2.6 in the past month.
From the Supply side, the gross natural gas production decreased by 1.8% during last week; it was 0.8% below the production level in 2011. Imports from Canada, on the other hand, rose by 1.2% (week-over-week); the imports were 13.3% above the imports recorded during the parallel week in 2011. The total U.S natural gas supply declined on a weekly scale by 1.6%. Finally, the natural gas rotary rig count decreased by 13 and settled at 473 rigs. Thus, the NG supply contracted during last week.
Natural gas injection to the underground natural gas storage was only 28 Bcf, which was much lower than the injection during the parallel week in 2011 - it was back then at 64 Bcf. Further, the injection was also 35 Bcf lower than the 5-year average injection. The current storage is at 3,402 Bcf for all lower 48 states, which is nearly 10.7% above the 5-year average. This percentage was lower than last week. This means the gap between the current storage levels and 5-year average storage contracted during last week. But if the future injections will exceed the injection from past years, the gap could expand. The weather, see below, could continue affecting future injections.
According to the EIA, during the previous week, the average U.S NG consumption rose 2.7%. The power sector led the rise with a 7.3% gain (week over week). Alternatively, the residential/commercial sector's NG demand declined by 4.3% (week over week). The total demand for NG rose by 2.6% compared with the previous week's levels; it was also 12.2% above the demand levels during the same week in 2011.
So the natural gas supply tumbled while the demand increased during last week. Thus, the natural gas market has tightened again compared to the previous week.
As I have already pointed out in the past there tends to be a strong seasonality effect during August. But there is no clear seasonality effect for September: in three of the past five years, prices of natural gas didn't do much (less than 5% shift) during the month. In two other years (2007 and 2009) prices hiked.
Hurricane Season Continues
The weather was warmer than normal: During last week the U.S temperatures (on a national level) were higher by 2.7 degrees than the 30-year normal temperature but 0.1 degrees lower than the same week in 2011. If the temperatures pick up, the demand in certain sectors are likely to rise. Hurricane Season will continue raise concerns in regards to the effects it could have on natural gas production. As indicated above, Hurricane Isaac has already caused delays in production that was reflected in last week's production numbers. Nonetheless, if there won't be any additional tropical storms or Hurricanes that could adversely affect production or damage infrastructure, then natural gas production is likely to resume its course.
So what's the bottom line?
Based on the recent developments in the natural gas demand and supply, it seems the natural gas market has tightened again. Hurricane Isaac may have had some adverse effect on production but it was for a short period. Further, the decline in the injection to NG storage didn't seem to bother commodities traders to trade down natural gas during last week. If the production won't pick up anytime soon, if the weather remains warmer than normal and if the natural gas injection continues to be lower than in recent years, then I guess natural gas prices will eventually start to rally. Nonetheless I still think natural gas will remain well under the $3 mark in the near future.
For further reading see "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.