No Rally For Natural Gas - Come Back Next Winter

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Includes: CHK, UNG, USO
by: Lior Cohen

The recent rally of natural gas (NG) prices was very short and in just a matter of weeks, natural gas fell back to its level from the beginning of May. What is next for natural gas? Has the fundamentals changed during last week? Let's examine the recent developments in the natural gas market from last week and analyze the shifts in NG prices.

Between April 30th and May 24th the price of Henry Hub (spot) rose by 26.54%; United States natural gas price also increased by 14.7%. This rally however was short lived because since then the Henry Hub (spot) tumbled down by 18.35% and UNG by 18.5%. This means the rally was erased in a matter of a couple of weeks. The currently low prices of NG aren't helping energy companies such as the struggling company Chesapeake Energy Corporation (NYSE:CHK) that continues to dwindle around the $14-$17 price range.


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So what's next for natural gas prices?

The warmer than normal weather keeps natural gas traders optimistic there will another comeback for NG but I speculate even if there will be another rally; it will also be for a short period at best. Let's examine what has changed in regards to the fundamentals in this market.

Oil Prices

One factor to consider is the recent tumble in oil prices and by extension United States oil. During May/June the linear correlation between oil and Nat gas was 0.376 (daily percent changes), which is strong and positive. This correlation might just be a fluke, but even so it does make sense for the decline in oil prices to coincide with the recent drop in natural gas. At best this fall in oil won't help NG to recover.

Warmer Weather

During last week the, the U.S. temperatures (on a national level) were 4.7 degrees higher than the 30-year normal temperature and 1.4 warmer than the same week last year.

Despite the warmer than normal weather and the critical fire weather in certain area such as south-central Wyoming it doesn't seem to push up demand for natural gas.

Demand

During last week the average U.S. NG consumption fell by 2.76%.

The power sector led the drop with a 10.09% decline. The total demand for NG was 2.41% below previous week's levels; nonetheless, it was 5.85% above the same week in 2011. This means, the higher than normal average temperature (on a national level) is keeping the demand slightly higher than last year.

Supply

From the Supply side during last week the gross natural gas production also declined by 1.33%; it was 2.57% above the production level in 2011. Imports from Canada increased by 1.46% (week-over-week); the imports were also 19.32% higher than during the same week in 2011. During last week, the total U.S natural gas supply declined by 1.28% but was 2.69% higher than last year. Finally, the natural gas rotary rig count decreased by 6 and reached 588.

So the total demand and supply are slightly higher than last year, but demand and supply declined on a weekly scale. The rate change for both the supply and demand was similar so it appears the natural gas market hasn't got much tighter or looser compared to the previous week.

Storage

Natural gas injection to the underground natural gas storage was slightly lower than the injection during the parallel week in 2011 by nearly 18 Bcf. The current storage is at 2,877 Bcf for all lower 48 states, which is still nearly 32% above last year and 5-year average. Even though the storage levels were a few weeks back around 40% above last year and 5-year average, if the demand won't rise by a higher rate than the supply, the storage level will remain higher than historic levels in the weeks to follow. This means the natural gas prices will remain low.


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Even if there will be another rally in natural gas prices in the weeks to follow, assuming the warmer than normal weather will continue and will also induce an increase in consumption of natural gas, I still think the natural gas market will remain loose and an increase in demand could be sustains with the high productions and imports. As long as the storage levels will remain much higher than in recent years, natural gas prices are likely to remain low.

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