The price of natural gas (November delivery) continued its upward trend throughout most of last week. According to the recent EIA report, natural gas injection was lower than last year's injection for the sixth consecutive week. The weather reports predict a mild weather in the U.S. for the coming days. What's next for natural gas market? Will natural gas prices hit the $4 mark? Let's examine the recent changes in the natural gas market in order to answer these questions.
During last week, the price of Henry Hub (spot) rose again by 6.2%. Furthermore, the future price (short-term delivery) increased by 3.7% and United States Natural Gas (UNG) also rose by 6.2%. The recent rise in the price of natural gas may have contributed to the recovery of natural gas and oil producers' stocks, such as Chesapeake Energy Corporation (CHK) -- during the past week, shares of the company hiked by 4.9%.
The chart below shows the recent recovery of natural gas prices during recent weeks.
Click to enlarge images.
Natural gas injection to underground natural gas storage was 72 Bcf, which was still well below the injection from the parallel week in 2011, when it was 112 Bcf. Furthermore, the injection was also 12 Bcf lower than the five-year average injection. The current storage is at 3,725 Bcf for all lower 48 states, which is nearly 7.8% above the five-year average. Thus, the gap between the current storage levels and five-year average storage contracted again compared to the previous week.
Assuming future injections will be at the same pace as the five-year average injections, my (very) crude estimate, as seen in the table below, is that the storage levels will peak during 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 affect it.
From the supply side, the gross natural gas production edged down by 0.2% during last week; it was still 1.6% above the production level in 2011. Imports from Canada rose by 2.6% (week over week). The imports were also 2.5% higher than the parallel week in 2011. The total U.S. natural gas supply edged up on a weekly scale by only 0.05%. Finally, the natural gas rotary rig count fell by 15 and settled at 422 rigs. Therefore, the NG supply remained nearly unchanged during last week.
According to the EIA, during the past week average U.S. NG consumption rose by 6%. The residential/commercial sector led the rise with a 44.2% hike week over week. Alternatively, the power sector's NG demand tumbled by 11.8% (week over week). Finally, the industrial sector's demand for NG rose slightly. Despite this mixed trend in the changes in natural gas demand, the total demand for NG increased by 6% compared to the previous week's levels. Furthermore, the total demand was also 18.7% above the demand levels during the same week in 2011.
So, the natural gas supply remained virtually unchanged while demand sharply rose during last week. Thus, the natural gas market has tightened compared to the previous week.
Weather Projected to Get Milder
During last week, U.S. temperatures (on a national level) were warmer by 2.6 degrees than the 30-year normal temperature, and they were also 2.6 degrees warmer than the same week in 2011. There are reports that project milder weather this week that could lower the demand for natural gas for heating purposes. However, there are projections by the EIA that last year's warmer-than-normal winter won't be the case this year, so this winter's temperatures will likely be closer to normal. This means demand for natural gas is expected to be higher this winter than last winter.
So, what's the bottom line?
Based on the recent changes in the natural gas demand and supply, it seems as if the natural gas market has tightened up. Storage continues to rise at a slower pace than recent years. On the other hand the forecasts for milder weather, at least for the next several days, could lower the demand for natural gas, which, in turn, is likely to curb the recent rally of natural gas prices. Nonetheless, if demand doesn't tumble, if production doesn't pick up, if the weather isn't too comfortable, and if the natural gas injection remains lower than last year, then natural gas prices will trade, for now, around the $3.60-$3.70 range.
For further reading, see "Will The Recent Rally Of Natural Gas Help Chesapeake?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.