Last week, natural gas prices started off falling but by the second part of the week bounced back. During September, however, the price natural gas demonstrated an unclear trend. According to the recent EIA report, natural gas injection was still lower than last year's injection. The decline in temperatures in the U.S. may have been among the reasons for the recent decline in natural gas prices during last week. Will natural gas prices continue to fall? Let's examine the recent developments in natural gas market to and analyze what is next for natural gas.
The price of Henry Hub (spot) fell by 4.7% last week; furthermore, the future price (short-term delivery) declined by 1.7%. United States Natural Gas (UNG) also decreased by 1.2%. The recent decline in the price of natural gas didn't help rally some natural gas and oil producer stocks, such as Exxon Mobil (XOM). During the past week shares of the company slipped by 0.4%.
Nonetheless, during the month there was an unclear trend for natural gas prices as they shifted from gains to losses, as indicated in the chart below.
Click to enlarge images.
Natural gas injection to the underground natural gas storage was 67 Bcf, which was below the injection from the parallel week in 2011 (back then it was at 89 Bcf). Furthermore, the injection was also 5 Bcf lower than the five-year average injection. The current storage is at 3,496 Bcf for all lower 48 states, which is nearly 8.6% above the five-year average. This means the difference between the current storage levels and five-year average storage is contracting.
The chart below shows the much slower rate of injections during this year compare to previous years. If the future injections do not exceed the injections from recent years, the difference could nullify in the near future.
On the supply side, gross natural gas production rose by 1.6% during last week, and it was also 1.7% above the production level in 2011. Imports from Canada, on the other hand, decreased by 2.2% (week over week); the imports were 2.5% above the imports recorded during the parallel week in 2011. The total U.S. natural gas supply increased on a weekly scale by 1.3%. Finally, the natural gas rotary rig count fell by four and settled at 448 rigs. This means the NG supply slightly expanded during last week.
According to the EIA, during the previous week, the average U.S. NG consumption declined 3.7%. The power sector led the decline with a 13.1% drop (week over week). Alternatively, the residential/commercial sector's NG demand hiked again by 12.9% (week over week). Since the residential/commercial sector seems to represent only 10% of the total demand, the rise in this sector's demand for NG didn't curb the decline in the total demand for natural gas in the U.S. The total demand for NG declined by 3.9% compared to the previous week's levels; nonetheless, it was still 6.2% above the demand levels during the same week in 2011.
So the natural gas supply slightly rose expanded, while the demand contracted again during last week. Thus, the natural gas market has loosened compared to the previous week.
Weather Cooled Down a Bit
The weather cooled down even though it was still warmer than normal: During the past week, U.S. temperatures (on a national level) were higher by 0.3 degrees than the 30-year normal temperatures, but were 0.9 degrees cooler than the same week in 2011. This decline in temperatures may have contributed to the drop in demand for natural gas. There are, however, projections for a rise in temperatures in the next couple of weeks, which could raise the demand for natural gas and lower the injections. Hurricane season is likely to create uncertainty around its potential effect on natural gas production.
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 loosened up again for the second straight week. The decline in temperatures and the rise in injections are likely to pull down natural gas prices in the near future. On the other hand, the injections are still low compared to previous years, the rig count continues to fall, and, given that we are still in the midst of hurricane season, there is uncertainty regarding production. If demand continues to contract, if temperatures don't rise much, and if the natural gas injection continues to rise, then natural gas prices will likely decline.
For further reading, see "Will Natural Gas Hit $3?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.