Will Natural Gas Rally?

Includes: UNG, XOM
by: Lior Cohen

The price of natural gas (short term delivery) changed direction and tumbled down throughout most of last week. The recent tumble may have stemmed from the change in the weather as it got warmer than many had anticipated. According to the recent EIA report, storage slightly rose mainly due to an injection in the producing region. Based on the currently available information will natural gas change direction and rise? Let's examine the recent developments in the natural gas market.

During last week, the future price of Henry Hub (short term delivery) fell by 8.72%. Moreover, the United States Natural Gas ETF (NYSEARCA:UNG) also tumbled down by 11.3%. The recent tumble in the price of natural gas, may have contributed to the recent fall in major natural gas and oil producers' stocks such Exxon Mobil (NYSE:XOM): During last week, shares of the company decreased by 1.1%.

The chart below presents the developments in the price of natural gas during October and November. As seen, natural gas prices changed direction and declined during last week.


According to the latest EIA weekly report, the underground natural gas storage slightly rose by 4 and reached 3,877 Bcf after two extractions. It's very common to have changes in the storage levels during this season (see below for more). The current storage for all lower 48 states is only 5.2% above the 5-year average and 0.7% above 2011 storage.

This means, current storage isn't much higher than last year's storage and unless there will be smaller extractions than in previous years the difference between current storage and recent years' storage will continue to contract.


From the demand standpoint, during last week, the average U.S NG consumption rose again by 8.7%. The residential/commercial sector led the charge again with a 22.2% gain (week over week). Conversely, the power sector's NG demand fell by 4.9% (week over week). Finally, the industrial sector's demand slightly rose by nearly 1.9% (W-o-W). As a result, the total demand for NG rose by 8.6% compared to last week. Finally, the total demand was also 14.6% above the demand during the same week in 2011.


From the Supply standpoint, the gross natural gas production rose by 0.5% during last week; it was also 0.6% above the production in 2011. Alternatively, imports from Canada declined by 1.3% (week-over-week); the imports were still 3.7% higher than the same week in 2011. Moreover, the total U.S natural gas supply edged up on a weekly scale by 0.3%. Finally, the natural gas rotary rig count fell by 11 and reached 413 rigs. Therefore, the NG supply slightly expanded during last week. According to a recent report, the natural gas rotary rig count decreased by 4 and reached 424 rigs. The recent moderate fall in number of rigs could suggest a potential drop in natural gas production.

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


During November it's very common to have little change in the natural gas storage. The table below shows the change in storage during November in the past five years. As seen, the storage didn't change much. Therefore, this could mean in the next storage report there might be an additional low volume change in storage. The sharp drop in storage should commence in December.

Mild Weather Up Ahead?

During the last week, the U.S temperatures (on a national level) were 0.4 degrees cooler than the 30-year normal temperature and 3.6 degrees cooler than the same week in 2011. Following the slightly colder than normal weather during last week, current forecasts are for mild weather for this week, which could lower the demand for heating; this could consequently lower the demand for natural gas in the residential/ commercial sectors.

So What's Next For Natural Gas?

The seasonal shift results in little change in the natural gas storage that is likely to continue this week. Many are still trying to figure out what kind of winter the U.S will have, which could keep the high volatility in natural gas prices in the days to follow.

The expected mild weather could lower the demand for natural gas and this could ease the price pressures from the demand side. Moreover, natural gas production remains stable and thus lowers the price pressures from the supply side. The current storage is nearly the same as last year. Therefore, the price of natural gas might bounce back after its sharp decline during last week. The expected mild weather is likely to keep natural gas prices from hiking during the coming days. But the sharp rise in price are likely to start as the weeks will progress, assuming the cold weather will arrive by then.

For further reading see "Will Exxon Continue To Trade Up?"

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.