Will Natural Gas Resume Its Downward Trend?

Includes: CVX, UNG
by: Lior Cohen

The price of natural gas (short-term delivery) changed direction and rose during last week. The recent rise may have been due to a decline in storage and a modest drop in temperatures. Will natural gas change direction and resume its downward trend? Let's examine the recent changes in the natural gas market.

During the previous week, the future price of Henry Hub (short-term delivery) rose by 4.35%. Moreover, United States Natural Gas (NYSEARCA:UNG) also rallied by 3.7%. Current Henry Hub future prices are nearly $0.22 per mil. BTUs above the natural gas price during the same week last year. The rise in the price of natural gas may have contributed to the recent rally of major natural gas and oil producers' stocks such Chevron Corporation (NYSE:CVX): During last week, shares of the company increased by 1.8%. If the price of natural gas will resume its downward trend it could lower the expected revenues of Chevron and thus reduce its stock price.

The chart below shows the developments in the price of natural gas during November and December. As seen, natural gas prices changed direction and rallied during last week.

(click to enlarge)


According to the recent EIA weekly update, underground natural gas storage declined by 82 Bcf and reached 3,724 Bcf. The current storage for all lower 48 states is 10.2% above the 5-year average and 1.8% above last year's storage. This is a rise in the gap between the previous years' storage and current storage. Thus, following the recent extraction natural gas storage is falling at a slower pace than in previous years.


From the demand side, during the previous week, the average U.S NG consumption edged down by 0.25% and was also 5.3% lower than the same week last year. The power sector led the fall with a 2.5% drop (week over week) and was also 6.5% lower than last year. Conversely, the residential/commercial sector's NG demand rose by 0.8% (week over week). Finally, the industrial sector's demand increased by nearly 0.3% (W-o-W). As a result, the total demand for NG edged up by 0.2% compared to last week. Finally, the total demand was also 4.9% below the demand during the same week last year. This means the demand for natural gas remained virtually unchanged during last week but remained low compared to last year.


From the supply side, gross natural gas production rose by 0.7% during last week; it was also 1.8% above the production in 2011. Moreover, imports from Canada rose by 0.6% (week-over-week); the imports were still 19.3% lower than the same week last year. The total U.S natural gas supply slightly increased on a weekly scale by 0.6%. Therefore, the NG supply slightly expanded last week. According to a recent report, the natural gas rotary rig count rose by 13 and reached 429 rigs, according to Baker Hughes. The recent rise in the number of rigs could suggest a slowdown in the contraction for natural gas production.

So during last week, the natural gas supply slightly expanded while the demand remained nearly unchanged. Further, compared to last year, the demand is still very low while the supply is only slightly lower than last year's. Thus, the natural gas market has slightly loosened compared to last week and the same week in 2011.


During December the extraction from natural gas storage tends to increase. The table below presents the changes in storage during November and the first couple of weeks of December (for seven weeks) in the past five years. As seen, the average extraction in 2012 is close to 2011's and well below the preceding years. If the storage will continue to fall at a slower pace than in previous years, this could pull down natural gas prices.

Warmer Weather in Late December

During last week, U.S temperatures (on a national level) were 4.4 degrees warmer than the 30-year normal temperature and 4.7 degrees warmer than the same week in 2011. Thus, the gap between the current temperatures and previous years' temperatures has shrunk compared to previous weeks. Current forecasts are for light snow in the Midwest and the Northeast region. The current projections are for temperatures to mostly vary from above average to normal for the season. Many estimate that during late December and early January the weather will remain warmer than normal. This could adversely affect the prices of natural gas.

So what's up ahead for natural gas?

Natural gas storage declined last week but if the weather will remain warmer than normal, the storage might dwindle at a slower rate than in previous years. The current forecasts for warmer than normal weather in the upcoming weeks could adversely affect the prices of natural gas. Moreover, natural gas production remains stable and thus lowers the price pressures from the supply side. Therefore, the price of natural gas might resume its downward trend in the near future and could fall to the $3 mark.

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.