Will Natural Gas Rally This Winter?

Includes: UNG, XOM
by: Lior Cohen

The winter storms that struck the East Coast raised the demand for natural gas. Despite this rise in demand, the price of natural gas (short-term delivery) slightly declined during the previous week. Moreover, according to the recent EIA report, the withdrawal from storage was lower than the five-year average. Following the recent developments, will natural gas prices change course and rally?

During the previous week, the future price of Henry Hub (short-term delivery) declined by 0.88%. Moreover, United States Natural Gas (NYSEARCA:UNG) also decreased by 1%. As of last week, the Henry Hub future prices were nearly $0.81 per million BTUs above the price for the parallel week in 2012. The recent modest fall in the price of natural gas may have also partly contributed to the decline of major natural gas and oil producers' stocks such as Exxon Mobil Corporation (NYSE:XOM). During last week, shares of Exxon decreased by 1.6%. If natural gas will continue to fall, it could lower the expected revenues of Exxon and thus adversely affect the company's stock.

The chart below presents the changes in the price of natural gas between January and February. As seen, natural gas prices shifted in an unclear trend in recent weeks.


According to the latest EIA weekly report, underground natural gas storage declined by 118 Bcf and reached 2,684 Bcf. This withdrawal was the smallest since the week ending on December 21st. In comparison, the storage declined by 78 Bcf during the same week last year and by 175 Bcf for the average five years. The current storage for all lower 48 states is 15% above the 5-year average but 7.8% below last year's storage. The table below shows the changes in storage from November to February (for fourteen weeks) in the last five years. As seen, the average extraction in 2012/3 is still much higher than the total withdrawal in 2011/2 but remains below the withdrawals in the preceding years.


From the demand standpoint, during last week, the average U.S NG consumption rallied by 7.4% and was 20% higher than the same week last year. The residential/commercial sector led the charge with a 10% rise (week over week) and was also 45.2% higher than last year. Moreover, the power sector's NG demand also increased by 7.3% (week-over-week). Finally, the industrial sector's demand rose by nearly 1.5% (W-o-W). As a result, the total demand for NG increased by 7.1% compared to the previous week. Finally, the total demand was also 20% above the demand during the same week in 2012. This means, the demand for natural gas expanded last week and was relatively high to last year.


From the Supply standpoint, the gross natural gas production inched down by 0.3% during the previous week; it was also 0.6% below the production in 2012. Moreover, imports from Canada also declined by 1.6% (week-over-week); the imports were also 0.7% lower than the same week last year. The total U.S natural gas supply slightly declined on a weekly scale by 0.5%. Therefore, the NG supply slightly contracted last week. According to a latest weekly update, the natural gas rotary rig count slightly declined by 3 and reached 425 rigs, according to Baker Hughes. The rig count is around 41% lower than the same week in 2012.

So during last week, the natural gas supply slightly contracted while the demand grew. Moreover, compared to last year the demand was higher while the supply slightly lower. Thus, the natural gas market has tightened compared to last week and compared to the same time last year.

Natural gas is Finding Winter Storm Nemo

During last week, the U.S temperatures (on a national level) were 5.1 degrees warmer than the 30-year normal temperature but 3.7 degrees cooler than the same week in 2012. Following Winter Storm Nemo, Winter Storm Orko will move to the Northeast at the beginning of the week. Despite these Winter Storms, the temperatures are expected to be much milder in the Northeast in the coming days but to remain below average in the Midwest. In the next couple of weeks, the temperatures are expected to be normal in the Northeast but lower than normal in the West Coast; the precipitation is projected to be above normal in the Northeast and Midwest. On a national level, the heating degrees for this week are expected to remain lower than normal but slightly above the heating degrees during same week last year. This means even though in parts of the U.S, the temperatures will remain lower than normal, this won't lead to a spike in the consumption for natural gas for heating purposes. The consumption is likely to remain higher than last year but lower than normal. Based on the current three month outlook, the temperatures in the Northeast and Midwest are still projected to be higher than normal.

So what's up ahead for natural gas?

The natural gas extraction from storage during this winter, so far, was lower than the five-year average. The natural gas demand is picking up in the Northeast on account of the weather. But the total demand, based on heating degrees, continues to be lower than normal. At the same time, natural gas storage remains higher than the five-year average. The supply slightly contracted last week but not by much. This could suggest the price of natural gas will remain around the $3.2 to $3.4 range. The unclear trend in the price of natural gas during January and the first week of February is likely to persist until after the uncertainty around the length and the severity of this winter becomes clear. The price of natural gas isn't likely to tumble to the $2 mark as it did last year, but it also isn't likely to rally to the $4 price range. My guess is that once the winter storms depart the Northeast and Midwest, the price of natural gas will resume its downward trend.

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.