The Rise And Fall Of Natural Gas

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Includes: CHK, UNG
by: Lior Cohen

Natural gas has had a turbulent time in recent weeks: the price of natural gas and by extension United States Natural Gas (NYSEARCA:UNG) has tumbled down during the week after NG had spiked between mid April and mid May. What happened in the natural gas market that could account such a sharp turn in the price of UNG? I have already claimed in the past that the recent rally in natural gas isn't due to a fundamental shift and thus wouldn't last long. Let's examine the fundamental changes from last week and deconstruct this shift in natural gas prices.

The price of Henry Hub spiked by 40.76%%, while the United States Natural Gas price rose by 30.3% between April 20th and May 21st. The ongoing low prices aren't helping energy companies such as Chesapeake Energy Corporation (NYSE:CHK), the second largest natural gas producer in the U.S. (even though Chesapeake has many other problems that contributed for the stock's decline in recent weeks).

The chart below shows natural gas spot price and short term future between April and May.


(Click to enlarge)

I have already referred to the suggestions and possible explanations for the recent rally in natural gas prices. Let's examine the recent shift in natural gas prices: since May 21st the Henry Hub spot price fell by 7.72%, the future price (short term) by 7.28% and United States Natural Gas fell by 9.9%. This decline is coming close the expiry of the upcoming future contract and could be related to the decline in prices, but there could be some additional factors to consider:

Seasonality

The recent rally in natural gas prices is common during these months: if the rally was related (even partly) to a seasonality effect then it only makes sense the rally won't last long and shift from gains to losses.

Demand

During last week the average U.S. NG consumption fell again by 0.9%.

The residential/commercial sector led the decline with a 9.14% decline. While the total demand for NG was 0.86% below the previous week's levels, it was still 8.98% above the same week in 2011. This means, the higher than normal average temperature (on a national level) is keeping the demand high than last year but isn't picking up any further.

Supply

From the Supply side during last week the gross natural gas production edged down by 0.04% but was 3.63% above the production level in 2011. Imports from Canada increased during last week by 2.03%; they were also 9.22% above the levels in 2011. The total supply of natural gas rose by 0.17% during last week. Furthermore the natural gas rotary rig count increased by 2 and reached 600.

So the total demand and supply are higher than last year, but demand declined by a sharper rate than the supply from the previous week, i.e. the natural gas market isn't getting any tighter.

Storage

Despite the decline in demand, natural gas injections to the underground natural gas storage were lower than the injection during the parallel week in 2011 by nearly 30 Bcf. The current storage is at 2,744 Bcf for all lower 48 states, which is still nearly 38% above last year and 5-year average.


(Click to enlarge)

During the past four weeks the injections were lower than the injections during the parallel week in 2011 by nearly 30 Bcf. If this trend will continue the storage level will reach the normal storage levels of 3,800-4,000 Bcf.

I suspect the decline in injections is likely due to low imports and less to do with the decline in production. If the natural gas market will further tighten the supply is likely to pick up again (by raising imports) and the natural gas prices will continue to fall. Since the natural gas markets don't seem to tighten for now and continues to be loose, I still speculate the decline in natural gas is likely to continue in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.