The price of natural gas (November delivery) rose during the second half of last week. According to the recent EIA report, natural gas injection was much small than last year's injection and the 5-year average injection. The weather reports still predict mild weather but slightly cooler than normal temperatures in the U.S in the next several days. What is up ahead for natural gas? Let's analyze the recent developments in the natural gas market.
During last week, the price of Henry Hub (spot) increased again by 1.5%; further, the future price (short-term delivery) edged up by 0.3%. On the other hand, the United States Natural Gas (UNG) price edged down by 0.3%. The recent increase in the price of natural gas may have slightly contributed to the rally of natural gas and oil producers' stocks such as Chevron Corporation (CVX): During last week, the shares of the company rose by 1.2%.
The chart below shows the recent recovery of natural gas prices during the month. As seen, natural gas prices recovered from their fall during the first half of last week.
According to the EIA, natural gas injection to the underground natural gas storage was only 51 Bcf, which is less than half the injection during the parallel week in 2011 - back then it was 103 Bcf. Further, the injection was also 15 Bcf lower than the 5-year average injection. The current storage is at 3,776 Bcf for all lower 48 states, which is nearly 7.1% above the 5-year average. The gap between the current storage levels and 5-year average storage shrunk compared to the previous week. Assuming the future injections will be at the 5-year average injections rate, my (very) crude projection, as presented in the table below, is that the storage levels will peak during mid-November at almost 4,000 Bcf.
From the supply side, the gross natural gas production edged down again by 0.25% during the previous week; it was 0.6% above the production level in 2011. Imports from Canada declined by 5.2% (week-over-week); the imports were also 8.8% lower than the parallel week in 2011. The total U.S natural gas supply decreased on a weekly scale by 0.6%. Finally, the natural gas rotary rig count rose by 5 and settled at 427 rigs. Therefore, the NG supply slightly contracted during last week.
During the previous week, the average U.S NG consumption fell by 4%. The residential/commercial sector led the fall with a 9.5% decline (week over week). Further, the power sector's NG demand also fell by 2.7% (week over week). Finally, the industrial sector's demand for NG edged up. As a result of these shifts, the total demand for NG decreased by 4% compared with the previous week's levels; on the other hand, the total demand was still 9.7% above the demand levels during the same week in 2011.
So the natural gas supply and demand slightly contracted during last week. Thus, the natural gas market has slightly loosened compared to the previous week.
Whether Expected to Get Cooler
During last week, the U.S temperatures (on a national level) were 4.6 degrees cooler than the 30-year normal temperature, and they were also 7.4 degrees cooler than the same week in 2011. There are reports that project temperatures may fall again this week, mainly in the East, but the weather will remain mild, which could hold back the demand for natural gas from further growing compared to last week. Nonetheless, the cooler than normal weather may keep the demand for natural gas, mainly in the residential/ commercial sectors, higher than the same period last year. This means, the demand for natural gas is expected to remain higher than last year but won't increase much compared to last week's consumption.
So what's next for natural gas?
Based on the recent developments in the natural gas demand and supply, it seems the natural gas market has slightly loosened up. The storage level is still high compared to previous years but the gap continues to shrink as the injections remain low. Further, the forecasts for cooler weather could keep the demand for natural gas high, compared to previous years, which, in turn, is likely to maintain the prices natural gas at their current level. Based on the above-mentioned, I guess natural gas prices will continue to trade around the $3.6-$3.7 range.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.