Will Natural Gas Change Direction And Fall?

 |  Includes: UNG, USO, XOM
by: Lior Cohen

The price of natural gas (November delivery) passed the $3.50 mark on Tuesday before tumbling down the following day. Nonetheless, natural gas prices increased on a weekly scale. According to the recent EIA report, natural gas injection remained lower than last year's injection and the 5-year average injection. The weather reports still predict a drop in temperatures in the U.S in the next couple of weeks. Will natural gas prices continue to rise in the near future? Let's examine the recent developments in the natural gas market.

During the previous week, the price of Henry Hub (spot) increased by 6.5%. Further, the future price (short term delivery) also increased by 2.4% and the United States Natural Gas (NYSEARCA:UNG) price also increased by 2.2%. The recent rise in the price of natural gas may have contributed to the rally of natural gas and oil producers' stocks such as Exxon Mobil Corporation (NYSE:XOM): During last week, the shares of the company rose by 1.2%.

The chart below shows the recent recovery of natural gas prices during September and October.

Click to enlarge


Natural gas injection to the underground natural gas storage was 77 Bcf, which was still below the injection from the parallel week in 2011 -- it was then at 97 Bcf. Further, the injection was also 2 Bcf lower than the 5-year average injection. The current storage is at 3,653 Bcf for all lower 48 states, which is nearly 8.3% above the 5-year average. Thus, the gap between the current storage levels and 5-year average storage slightly contracted compared to the previous week. Assuming the future injections will be close to the 5-year average injections, my (very) crude estimate, as seen in the table below, shows that the storage levels will peak around mid-November at nearly 4,000 Bcf. This estimate, however, should be taken with a grain of salt as the weather and future changes in the production could influence this figure.

Click to enlarge


From the supply side, the gross natural gas production edged up by 0.2% during the previous week; it was also 1.5% above the production level in 2011. Imports from Canada also increased by 0.9% (week-over-week); the imports were very close to the imports recorded during the parallel week in 2011. The total U.S natural gas supply edged up on a weekly scale by 0.3%. Finally, the natural gas rotary rig count rose by 2 and settled at 437 rigs. This means, the NG supply nearly slightly improved during last week.


According to the EIA, during the previous week, the average U.S NG consumption fell by 0.3%. The residential/commercial sector led the fall with a 4.4% drop (week over week). Alternatively, the power sector's NG demand rose by 2.7% (week over week). Finally, the industrial sector's demand for NG declined as well. Despite this mixed trend in the changes in natural gas demand, the total demand for NG declined by 0.3% compared with the previous week's levels; on the other hand, the total demand is still 6.9% above the demand levels during the same week in 2011.

So the natural gas supply slightly expanded while the demand declined during last week. Thus, the natural gas market has loosened compared to the previous week.

Weather Projected to Get Cooler

During last week, the U.S temperatures (on a national level) were lower by 0.4 degrees than the 30-year normal temperature, and they were also 3.4 degrees cooler than the same week in 2011. There are still reports that project a decline in temperatures in the next couple of weeks that could raise the demand for natural gas for heating purposes. But this upcoming winter might be a warm one, which could mean the demand for natural gas this winter won't be as high as it was in the past (not including of course the 2011-2012 winter which was one of the warmest winters on record).

Oil Prices

The recent fall in oil prices during recent weeks and by extension United States Oil (NYSEARCA:USO) may have adversely affected NG prices.

During September-October the linear correlation between oil price and NG (short term delivery) reached 0.41 (daily percent changes), which is a mid-strong and positive relation. This correlation, however, varies and should be taken with a grain of salt. Nonetheless, if the correlation between oil and NG will hold up, and if oil prices will continue to fall, then this could suggest that the price of oil might pull down natural gas, or at least impede its progress.

So what's the bottom line?

Based on the recent changes in the natural gas demand and supply, it seems the natural gas market has loosened up a bit. The ongoing fall in oil prices could also pull down natural gas prices. On the other hand, the forecasts for a decline in temperatures could raise the demand for natural gas, which, in turn, is likely to drive natural gas prices up. The rig count remains low and the Hurricane season keeps the uncertainty regarding production. These opposing forces may keep natural gas prices shifting from gains to losses throughout the week. Nonetheless, if the demand will rise, if the temperatures will further drop, and if the natural gas injection will remain lower than in previous years, then I guess natural gas prices will resume their rally towards the $3.5 mark.

For further reading see "What's Up with Natural Gas? Nothing Much"

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.