The price of natural gas bounced back last week to pass the $4.3 mark. United States Natural Gas (NYSEARCA:UNG) has also recovered from its tumble earlier this month. Looking forward, the expected decline in temperatures in the coming weeks could result in a sharp rise in demand for natural gas for heating purposes. Moreover, according to the recent U.S. Energy Information Administration weekly update, last week's extraction from storage was the highest for this season and much higher than the 5-year average withdrawal. Will natural gas continue to rise? Let's examine the recent developments in the natural gas market.
During January (up-to-date), the price of Henry Hub (short-term delivery) rose by 2.3%. Furthermore, United States Natural Gas also increased by 0.9%. As of last week, the Henry Hub price was also $0.87 per million BTUs higher than the price during the same week in 2013. Last week's rally of natural gas price may have contributed to the moderate rise of shares of gas and oil producers such as Exxon Mobil (NYSE:XOM): during last week, Exxon's stock slightly rose by 0.6%. If natural gas prices continue to rally, this could slightly improve Exxon's expected revenues and may slightly reduce the company's valuation.
The chart below presents the shifts in the price of natural gas and UNG in the past several months. Prices are normalized to January 31st, 2013. As you can see, UNG has underperformed the price of natural gas by roughly 18.3 percentage points due to Contango that led to roll-decay.
Based on the EIA weekly update, the underground natural gas storage dropped by 287 Bcf and reached 2,530 Bcf. In comparison, in 2013 the storage declined by only 148 Bcf; the 5-year average extraction was 168 Bcf. The current storage for continental states is 20.7% lower than last year's storage and 15% lower than the 5-year average.
The table below shows the changes in storage and weekly prices during November-January. It also presents the shifts during the same time last year and the 5-year average.
As you can see, despite the high extraction rate in the past couple of weeks, the average weekly price of natural gas declined. If this week's extraction remains higher than normal, this might pressure up the prices of natural gas.
From the demand standpoint, during last week the average U.S. natural gas consumption decreased by 30% (week-over-week). This was also 5.8% below the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the fall, as they tumbled down by 38% and 31% respectively. These two sectors' consumption was also below last year's levels by 17.1% and 3% respectively. Finally, the industrial sector's demand slightly fell by 8.7%, week-over-week. In total, the demand for NG decreased by 30% compared to last week. The total demand was also 5.6% lower than in 2013. If the total demand changes course and rises, it could continue to positively affect the price of natural gas.
From the supply standpoint, the gross natural gas production inched up by 0.5% during last week; it was also 2% higher than the production level last year. Conversely, imports from Canada fell by 24% week-over-week; imports were still 23% higher than in 2013. The total U.S. natural gas supply declined by 2.5% compared to last week.
According to Baker Hughes' latest weekly update, the natural gas rotary rig count rose by 8 rigs to touch 365 rigs. The rig count is 15% below the number recorded in 2013. If the supply doesn't rise, it may pull up the price of natural gas.
Therefore, during last week the natural gas supply slightly fell, but the demand tumbled down mainly due to sharp fall in consumption in the power and residential/commercial sectors. According to the EIA's supply/demand balance, the supply is still lower than the total natural gas consumption, but the gap between the two has narrowed in recent weeks. If demand starts to pick up again, the gap between supply and demand will further widen; in such a scenario, the price of natural gas could resume its upward trend.
Weather and natural gas
During last week, U.S. temperatures averaged much lower than normal levels. Looking forward, the current forecasts show that the temperatures may reach well below normal levels throughout the East, mainly in the Northeast, and above normal in the West coast. Based on this projection of below normal temperatures in many parts of the U.S., the demand for natural gas in the residential/commercial sector is likely to bounce back and sharply increase in the coming weeks. Moreover, the heating degrees days across the U.S are estimated to be slightly higher than normal and last year. This could serve as another indication that the demand for heating will be slightly higher than normal in the coming week.
Following the sharp rise in the price of natural gas, it might change course earlier this week and pull back down. Moreover, the sharp weather changes are likely to also reflect in a rise in natural gas price volatility. In the coming weeks, however, the ongoing colder-than-normal weather, the rise in heating degrees and low storage levels are likely to keep pressuring up the price of natural gas towards the $4.5 mark. Finally, the expected rise in consumption may also widen the gap between supply and demand, which could tighten the natural gas market.
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.