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Last week, natural gas prices changed direction from the previous weeks and rose precipitately in a matter of days. During most of September, however, the price of natural gas demonstrated an unclear trend. According to the recent EIA report, natural gas injection was still lower than last year's injection, but was slightly higher than the five-year average injection. The weather forecast for a decline in temperatures in the U.S. may have been among the factors for the recent rally in natural gas prices. Will natural gas prices continue to rise on their way to the $3.50 mark? Let's examine the recent changes in the natural gas market to analyze what is next for natural gas.

During the previous week, the price of Henry Hub (spot) rose by 9.3%; furthermore, the future price (short-term delivery) hiked by 14.9% and United States Natural Gas (NYSEARCA:UNG) also increased by 8.2%. The recent rise in the price of natural gas didn't help rally some of the natural gas and oil producer stocks, such as Chevron (NYSE:CVX). During last week, the shares of the company declined by 1.1%.

The chart below shows the recent recovery of natural gas prices in recent weeks.

Click to enlarge image.

Storage

Natural gas injection to the underground natural gas storage was 80 Bcf, which was below the injection from the parallel week in 2011 (back then it was 111 Bcf). On the other hand, the injection was 5 Bcf higher than the five-year average injection. The current storage is at 3,576 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 remained unchanged compared to the previous week.

Supply

From the supply side, the gross natural gas production edged down by 0.1% during last week. But it was still 1.21% above the production level in 2011. Imports from Canada, on the other hand, increased by 4.6% (week over week); the imports were 1.9% above the imports recorded during the parallel week in 2011. The total U.S natural gas supply edged up on a weekly scale by only 0.3%. Finally, the natural gas rotary rig count rose by six to settle at 454 rigs. This means the NG supply nearly didn't change much during last week.

Demand

According to the EIA, the average U.S. NG consumption rose by 2.6% last week. The residential/commercial sector led the rise with an 11.7% gain (week over week). Alternatively, the power sector's NG demand declined by 1% (week over week). Since the residential/commercial sector represents only 10% of total demand, the rise in this sector's demand for NG didn't much affect the total demand for natural gas in the U.S. The total demand for NG rose by 3% compared with the previous week's levels, mainly due to the rise in the demand for gas in the industrial sector. Furthermore, the total demand was also 11.4% above the demand levels during the same week in 2011.

So, the natural gas supply didn't expand while the demand rose again during last week. Thus, the natural gas market has tightened compared to the previous week.

Seasonality

There might be a seasonality effect during the month of October: In four out of the past five years, prices of natural gas rose, in three of those years by less than 5% and once (in 2009) by over 40%. During October 2010 the price of natural gas declined.

Weather Projected to Get Cooler

The weather became a bit hot again, mainly in the West, after it had cooled down in the previous couple of weeks. Last week, U.S. temperatures (on a national level) were lower by 0.9 degrees than the 30-year normal temperature, but they were two degrees warmer than the same week in 2011. Nonetheless, there are reports of a projected decline in temperatures, mainly in the Midwest, that could raise the demand for natural gas for heating purposes. 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 tightened up. The forecasts for a drop in temperatures that could raise the demand for natural gas are likely to pull up natural gas prices in the near future. Furthermore, despite the rise in the injections, they are still low compared to last year. The rig count is still low and hurricane season creates uncertainty regarding production. If the demand continues to expand, if temperatures drop further (mainly in the Midwest), and if the natural gas injection remains lower than in recent years, then natural gas prices will continue to rally and perhaps even hit the $3.50 mark.

For further reading, see "Will Natural Gas Resume Its Rally?"

Source: Will Natural Gas Continue To Trade Up?