The price of natural gas (short-term delivery) changed direction and rallied during the previous week. The high volatility may have been due to the uncertainty around the ramifications of Hurricane Sandy. On the one hand, the demand for natural gas in the power sector declined in part in the Northeast region due to the power failures. On the other hand, the demand for natural gas for heating increased in certain regions where there was a sharp drop in temperatures and heavy snow. There weren't any reports of damage in any of the natural gas pipelines. According to the recent EIA update, natural gas injection was again lower than last year's injection, but higher than the five-year average injection. What's up ahead for the natural gas market? Let's try and figure out this issue.
During last week, the future price of Henry Hub (short-term delivery) rose by 4.4%. Alternately, United States Natural Gas (UNG) decreased by 4.8%. Despite the recent rally in the price of natural gas, it didn't seem to curb the tumble of major natural gas and oil producers' stocks, such as Chesapeake Energy (CHK) -- during last week, the shares of the company plummeted by 8%.
The chart below presents the developments in the prices of natural gas during the month.
Click to enlarge images.
According to the latest EIA weekly report, natural gas injection to the underground natural gas storage reached 65 Bcf, which was still lower than the injection during the same week in 2011 (back then it was 78 Bcf). Conversely, the injection was 8 Bcf higher than the five-year average injection. The current storage is at 3,908 Bcf for all lower 48 states, which is nearly 7.1% above the five-year average. The gap between the current storage levels and five-year average storage remained virtually the same compared to last week. Assuming the future injections will continue to be close to the five-year average injections rate, my (very) crude estimate is that the storage levels will peak in the upcoming weeks to reach around 4,000 Bcf.
The chart below presents the development of the U.S. natural gas storage and changes in the weekly price of natural gas (spot) between the years 2010 and 2012.
From the demand side, during last week average U.S. NG consumption increased by 9.8%. The residential/commercial sector led the rise with a 34.8% gain (week over week). Conversely, the power sector's NG demand decreased by 3.7% (week over week). Finally, the industrial sector's demand for NG rose by nearly 3.2% (week over week). As a result of these sharp changes, the total demand for NG increased by 9.1% compared with the last week's levels. Finally, the total demand was only 0.5% above the demand levels during the parallel week in 2011.
From the supply side, gross natural gas production rose by 1.2% during last week; it was also 1.8% above the production level in 2011. Moreover, imports from Canada rose by 6.5% (week over week); the imports were still 6% lower than the parallel week in 2011. Furthermore, the total U.S. natural gas supply rose on a weekly scale by 1.5%. Finally, the natural gas rotary rig count rose by eight to reach 424 rigs. Therefore, the NG supply expanded during last week.
So the natural gas supply and demand expanded during last week. The demand rose by a sharper rate than the supply. Thus, the natural gas market has tightened compared to the previous week.
Hurricane Sandy's Aftermath and Natural Gas
Following Sandy, there was a sharp drop in demand for natural gas in the power sector in many regions in the East Coast. Conversely, in certain mountain regions there was a sharp rise in the demand for natural gas for heating purposes. This might have been the reason for the sharp rise in the demand for natural gas in residential/commercial sectors.
Despite the cold weather and Hurricane Sandy, last week U.S. temperatures (on a national level) were 3.9 degrees warmer than the 30-year normal temperature, but they were 4.4 degrees warmer than the same week in 2011.
There are predictions that the cold weather in the East will become milder in the days to follow, which should bring down the demand for natural gas in the residential/commercial sector.
So what's ahead for natural gas?
Based on the recent developments in the demand and supply, the natural gas market has tightened up. That could explain the recent rally in the prices of natural gas. Nonetheless, the ramifications of Sandy could result in another decline in the demand for natural gas in the power sector. The predictions of milder weather could also pull down the demand for natural gas in the residential/commercial sector. The storage level remained high compared to the five-year average injection. If injections continue to increase, if supply rallies further, and if the demand for natural gas changes direction and dwindles, then this will loosen up the natural gas market. This should lead to decline in the prices of natural gas.
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.