Will Natural Gas Continue To Rally?

Includes: UNG, XOM
by: Lior Cohen

The price of natural gas (short term delivery) changed direction and rallied last week. The recent rise may have been due to the recent EIA storage report. Will natural gas prices continue to rally? Let's examine the recent developments in the natural gas market.

During last week, the future price of Henry Hub (short term delivery) rose by 1.22%. Moreover, United States Natural Gas (NYSEARCA:UNG) also increased by 1.6%. As of last week, the Henry Hub prices were nearly $0.36 per million BTUs above the price for the same week in 2012. The recent rise in the price of natural gas may have contributed to the recent rally of major natural gas and oil producers' stocks such Exxon Mobil Corporation (NYSE:XOM): During last week, shares of Exxon rose by 0.7%. If natural gas will continue to rise it could raise the expected revenues of Exxon and thus positively affect the stock price.

The chart below shows the developments in the price of natural gas between November and January. As seen, natural gas prices changed direction and increased in the past couple of days.


According to the recent EIA weekly report, the underground natural gas storage tumbled down by 201 Bcf and reached 3,316 Bcf. This recent extraction was the largest for the season so far. In comparison, the storage declined by 95 Bcf during the same week last year, and by 143 Bcf for the average five years. The current storage for all lower 48 states is 10.7% above the 5-year average but 2.6% below last year's storage. Moreover, the table below presents the changes in storage from November to January (for ten weeks) in the past five years. As seen, the average extraction in 2012/3 is higher than the average extraction in 2011/2 but remains below the extraction in the preceding years.


From the demand side, during last week, the average U.S NG consumption declined by 8.1% but was still 8.2% higher than the same week last year. The residential/commercial sector led the fall with a 12.8% drop (week over week) but was also 14.4% higher than last year. Moreover, the power sector's NG demand also decreased by 3.4% (week over week). Finally, the industrial sector's demand decreased by nearly 1.4% (W-o-W). As a result, the total demand for NG declined by 8.1% compared to last week. Finally, the total demand was still 8% below the demand during the same week last year. This means, even though the demand for natural gas declined last week it remained relatively high to last year.


From the Supply side, the gross natural gas production declined by 0.4% during last week; it was also 1.1% below the production in 2012. Conversely, imports from Canada rose by 1.1% (week-over-week); the imports were also 2.1% higher than the same week last year. The total U.S natural gas supply inched down on a weekly scale by 0.22%. Therefore, the NG supply slightly contracted last week. According to a recent report, the natural gas rotary rig count edged down by 5 and reached 434 rigs, according to Baker Hughes. The rig count is nearly 45% lower than the same week in 2012. Despite these figures, the latest EIA outlook for January state the natural gas production will continue to rise through 2014.

So during last week, the natural gas supply slightly contracted, and the demand sharply fell. Compared to last year, however, the demand is still high while the supply is only slightly below last year's level. Thus, the natural gas market has slightly loosen compared to last week but tightened compared to the same time last year.

Cold Weather Doesn't Push the Demand for Natural Gas

During last week, the U.S temperatures (on a national level) were 2.4 degrees cooler than the 30-year normal temperature and 9.1 degrees cooler than the same week in 2012. In the days to come, the temperatures are expected to remain low in the Midwest and Northeast. Moreover, the temperatures are expected to remain lower than normal in the East Coast in the next couple of weeks, and the precipitation is expected to be above normal in the Northeast. On the other hand, on a national level the heating degrees this week are projected to be lower than normal and last year. This means even though the temperatures are lower than normal, the consumption for natural gas isn't higher than in previous years.

Based on the current three month outlook, the temperatures in the Midwest will remain above normal, but it's still unclear how it will turn out in the East Coast.

So what's next for natural gas?

The natural gas storage declined last week by a faster than normal rate. The temperatures are still low for the season but this didn't pull up the demand for natural gas. Moreover, the natural gas market has loosened last week. This could mean the price of natural gas will remain higher than last year's price but will remain low for the season compared to the five year average. The storage report might contribute to the upward trend in natural gas prices during the week, but my guess, based on the above, is that natural gas prices will remain below the $3.5 mark. In such a case, oil companies such as Exxon will be adversely affected by this trend.

For further reading see "Will Natural Gas Remain Low in 2013?"

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.