The price of natural gas (November delivery) changed direction and declined during last week. According to the latest EIA update, natural gas injection was lower than last year's injection but slightly higher than the 5-year average injection. Hurricane Sandy could have a strong effect on the price of natural gas from both the supply and demand sides. What is next for natural gas? Let's examine the potential effect of the Hurricane of natural gas market.
During the previous week, the price of Henry Hub (spot) decreased by 2.6%; the future price (short term delivery) tumbled down by 6.1%. Moreover, the price of United States Natural Gas (NYSEARCA:UNG) declined by 5.2%. The recent fall in the price of natural gas may have slightly contributed to the decline of natural gas and oil producers' stocks such as Exxon Mobil (NYSE:XOM): During last week, the shares of the company declined by 1.7%.
The chart below presents the developments in the prices of natural gas during the month. As seen, natural gas prices decline in the past several days.
According to the recent EIA update, natural gas injection to the underground natural gas storage was 67 Bcf, which is still lower than the injection during the parallel week in 2011 - back then it was 92 Bcf. Conversely, the injection was 2 Bcf higher than the 5-year average injection. The current storage is at 3,843 Bcf for all lower 48 states, which is nearly 7% above the 5-year average. The gap between the current storage levels and 5-year average storage remained nearly unchanged compared to the previous week. Assuming the future injections will be at the 5-year average injections rate, my (very) crude estimate is that the storage levels will peak during mid-November at nearly 4,000 Bcf. On the other hand, the recent Hurricane could change this estimate (see below for more).
The chart below shows the development of the U.S natural gas storage and shift in the weekly price of natural gas (spot) between the years 2010 and 2012.
From the Supply side, the gross natural gas production edged up by 0.27% during the previous week; it was still 1.1% above the production level in 2011. Alternatively, imports from Canada declined by 4.7% (week-over-week); the imports were also 7.9% lower than the parallel week in 2011. Further, the total U.S natural gas supply edged down on a weekly scale by 0.1%. Finally, the natural gas rotary rig count declined by 11 and reached 416 rigs. Therefore, the NG supply slightly contacted during last week.
During last week, the average U.S NG consumption declined by 2.8%. The residential/commercial sector led the fall with a 4.8% decrease (week over week). Further, the power sector's NG demand also declined by 2.8% (week over week). Finally, the industrial sector's demand for NG edged down. As a result of these developments, the total demand for NG decreased by 2.9% compared with the previous week's figures. Conversely, the total demand remained 1.6% above the demand levels during the same week in 2011.
So the natural gas supply and demand slightly contracted during last week. The demand fell by a sharper rate than the supply. Thus, the natural gas market has slightly loosened compared to the previous week.
Hurricane Sandy & Natural Gas
Hurricane Sandy is expected to reach the East Coast by late Monday or early Tuesday. It is expected to reach, among other places, Washington, Philadelphia, New York and New Jersey. The CME closed its trading in New York. The trading of natural gas will continue in OTC. This Hurricane could have short-term and mid-term effects on the natural gas markets. In the short term, the expected drop in demand for power in the East Coast could lower the demand for natural gas. In the mid-term, if the Hurricane damages pipelines it could adversely affect the supply and thus pull up the prices of natural gas. In any case, this Hurricane raises the uncertainty around natural gas and thus could raise the volatility of this commodity's price.
During last week, the U.S temperatures (on a national level) were 1.1 degrees warmer than the 30-year normal temperature, but they were 1.3 degrees cooler than the same week in 2011. The weather is among the reasons for the drop in demand for natural gas in recent weeks.
So what's next for natural gas?
Based on the recent changes in natural gas demand and supply, it seems the natural gas market has loosened up again. The storage level remains high compared to recent years but the gap continues to contract. Further, the upcoming Hurricane could lower the demand for natural gas in the East Coast in the near future. Conversely, the high uncertainly around the potential effect of the Hurricane on the natural gas market could result in big swings in the price of natural gas in the upcoming days (once the markets open again). Based on the above-mentioned I guess the prices natural gas will trade around the $3.4-$3.5 range.
For further reading see "Will Exxon Continue To Trade Up?"