What's Next For Natural Gas?

| About: The United (UNG)
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Summary

The natural gas market cooled down last week as the Henry Hub slipped. UNG also declined by a similar rate. Looking forward, natural gas is likely to resume its descent.

Despite the lower than normal temperatures the demand for natural gas in the residential sector is falling.

The elevated price of natural gas is likely to reduce the demand for natural gas in the power sector.

The natural gas changed direction and slightly declined during last week. United States Natural Gas (NYSEARCA:UNG) also slipped last week. According to the recent U.S Energy Information Administration weekly report, last week's natural gas withdrawal was well above the five year average but lower than last year's withdrawal. What is next for natural gas? Let's examine the recent changes in the natural gas market.

During the previous week, the price of Henry Hub (short term delivery) slipped by 1%. Moreover, United States Natural Gas also decreased by 1.2%. As of last week, the Henry Hub price also $0.47 per million BTUs higher than its price during the same week in 2013. Last week's modest decline in the price of natural gas may have contributed to the slight recovery of shares of some natural gas companies including Cheniere Energy (NYSEMKT:LNG): During last week, Cheniere Energy's stock inched down by 0.1%.

The chart below presents the developments in the prices of natural gas and UNG in past several months. Prices are normalized to November 29th, 2013. The chart shows that UNG has out-performed natural gas by roughly 16.7 percentage points due to the Backwardation in the futures market. This current situation suggests the market expectations are that the price of natural gas may drop in the coming months.

Source: Google Finance and EIA

Storage

According to EIA's recent weekly report, the underground natural gas storage declined by 74 Bcf and reached 822 Bcf. In comparison, last year the storage dropped by 94 Bcf; the five years average withdrawal was 17 Bcf. The current storage for all lower 48 states is 51.6% lower than last year's storage and 54.7% below the 5-years average.

The table below presents the shifts in storage and weekly rates in the past several months. The table also presents the changes in storage levels during last year and the five year average.

Source: EIA

Last week's withdrawal was above the five year average but lower than last year's. If this week's withdrawal remains higher than normal, this might keep the price of natural gas elevated.

Demand

From the demand side, during last week, the average U.S natural-gas consumption dropped by 15.8% (week-over-week). The consumption was also 4.4% below the natural gas consumption recorded during the same week in 2013. The residential/commercial and power sectors led the charge as they declined by 25.6% and 10.5%, respectively. The residential/commercial sector's consumption was also 4.8% lower than last year; the power sector's demand was 10.7% below last year's levels. If the price of natural gas remains above $4, it could slash again the demand in the power sector. Finally, the industrial sector's demand slightly fell by 2.5%, week over week. In total, the demand for NG tumbled down by 15.3% compared to last week. Moreover, the total demand was 4% lower than in 2013. If the total demand continues to fall further, it could drag down the price of natural gas.

Supply

From the Supply side, the gross natural gas production inched up again by 0.4% during the previous week; it was also 4% higher than the production level last year. Conversely, imports from Canada declined by 11.9% week over week; imports were also 19.5% lower than in 2013. The total U.S natural gas supply edged down by 0.4% compared to last week. If the supply remains nearly unchanged, it may pull up the price of natural gas.

According to Baker Hughes' recent weekly report, the natural gas rotary rig count decreased by 2 rigs to 316 rigs. The rig count is also 15.8% below the number of rigs recorded in 2013.

Therefore, during last week, the natural gas supply remained nearly unchanged, while the demand tumbled down. Due to the weak demand, according to the EIA's supply/demand balance, the gap between the supply and demand narrowed so that the supply was slightly above the demand. If the gap remains narrow, it could drag down the price of natural gas.

Weather and natural gas

During last week, U.S temperatures were cooler again than normal. In the next couple of weeks, the temperatures are expected to be lower than normal throughout the East coast mainly in the Midwest. But temperatures are projected to remain higher than normal in the West coast and in Florida. Furthermore, the U.S heating degrees days are expected to be lower than normal this week. This could suggest the lower than normal temperatures in the East won't be enough to increase the total demand for natural gas for heating purposes in the coming days.

Takeaway

Despite the ongoing cold weather mainly in the Midwest, the demand for natural gas is falling. Moreover, the currently elevated prices of natural gas are likely to reduce further the demand for natural gas in the power sector. These developments along with the stable supply could result in the prices of natural gas falling again closer to the $4 mark in the near future. Finally, the current low gap between supply and demand is likely pressure down the price of natural gas.

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.