Following the tumbling down of natural gas prices during last week, the trend has shifted and in the last couple of days natural gas prices and by extension United States Natural Gas bounced back. Was there a fundamental change that we should consider? I suspect this rally might continue as it could be driven by expectations for a warmer than normal weather in the next two weeks. In such a case this rally might reverse by the end of June. Let's examine the recent changes in the natural gas market from last week and analyze the recent turn in natural gas prices.
Between May 18th and June 1st the price of Henry Hub (spot) plunged by 12.5%; United States Natural Gas price fell by 16.7%. These low prices of NG aren't helping energy companies such as Chesapeake Energy Corporation (NYSE:CHK), the second largest natural gas producer in the U.S that continues to dwindle around the $14-$17 price range (even though there are many other reasons for the decline in CHK besides the low NG prices).
During this week the trend seems to have shifted as natural gas prices rose by 6.7% and United States Natural Gas by 4.6%.
Will this shift continue? How long will it last?
There are renewed speculations of a rise in natural gas demand in the U.S in the next couple of weeks on account of a potential warmer than normal weather. This in turn might drive prices up for the next couple of weeks.
According to the National Weather Service urban areas such as Chicago, New York and Philadelphia would see above-normal temperatures in the next couple of weeks. Even if this projection will prove to be correct, and thus raise the demand for natural gas, this could mean a rally in prices that will last a couple of weeks (assuming all things equal).
A rally in natural gas prices during June is common: in 2011 the Henry Hub rose by over 10% during the first couple of weeks of June; in 2010 prices increased by nearly 13%; in 2009 natural gas prices rose by nearly 13% in the first three weeks of June. Thus it is common to experience a rise in prices of Nat gas at the beginning of June. This rally doesn't last long and prices tend to come down during the second part of June.
During last week the average U.S NG consumption rose by 3.54%.
The power sector led the rise with a 13.2% gain. The total demand for NG was 3.59% above previous week's levels and 10.57% 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.
From the Supply side during last week the gross natural gas production edged up by 0.73% and was 3.86% above the production level in 2011. Imports from Canada hiked during by 9.34%; they were also 13.63% above the levels in 2011. The total supply of natural gas rose by 1.37% during last week. On the other hand, the natural gas rotary rig count decreased by 6 and reached 594.
So the total demand and supply are higher than last year, but demand rose by a sharper rate than the supply from the previous week, i.e. the natural gas market is getting a little bit tighter.
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 12 Bcf. The current storage is at 2,815 Bcf for all lower 48 states, which is still nearly 35% above last year and 5-year average. Even though the storage levels were a few weeks back around 50% above last year and 5-year average, if the demand won't sharply rise and production will remain robust, the storage level will continue to be higher than historic levels in the weeks to follow.
Therefore there might be another rally in natural gas prices in the next couple of weeks assuming the warmer than normal weather will induce higher demand for natural gas, but I suspect this rally won't last long; as long as the natural gas markets continues to be loose, I still speculate natural gas will remain low and resume their descent 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.