In the last couple of weeks there has been a rally in natural gas prices. In a single day the Henry Hub hiked by nearly 15%. The price of natural gas is still very low for the season. Last year the price was nearly $2.32 higher than this week's price. I have already argued in the past that natural gas isn't likely to make a comeback this summer. Nonetheless, before I will have to eat my own hat let's examine if this rally is founded by a major shift in the fundamentals. Further let's see if this rally is likely to continue so that natural gas will hit and maintain the $3 mark in the near future.
During June the price of Henry Hub (spot) rose by 8.68%; United States Natural Gas (UNG) price also increased by 8.5%. Further, since June 13th UNG rose by 19.5%. Despite the sharp rise in natural gas prices, they are still very low for the season. The currently low prices of NG aren't helping struggling energy companies such as Chesapeake Energy Corporation (CHK) as its stock price continues to dwindle around the $17-$18 price range.
So what's new for natural gas?
The warmer than normal weather, mainly in the Northeast is likely to be among the factors to pressure up natural gas prices. During last week the, the U.S temperatures (on a national level) were higher than the 30-year normal temperature and the same week last year.
Furthermore, according the EIA the Northeast is facing pipeline infrastructure constraints that may contribute to the tightening of the supply. Let's examine what has changed in regards to the fundamentals in this market.
One factor to consider is the recent tumble in oil prices and by extension United States Oil (USO). During the past month the linear correlation between oil and natural gas was 0.499 (daily percent changes), which is strong and positive. This correlation isn't constant and varies over time. If this correlation will continue to hold up and oil prices will further fall it might pull down natural gas prices.
A rally in natural gas prices during June isn't something new: in 2011 the Henry Hub rose by over 10% during the first couple of weeks of June; in 2010 prices rose by nearly 13%; in 2009 natural gas prices rallied by nearly 13% in the first three weeks of June. Thus it is common to see a rally in prices of natural gas during June. This rally doesn't last long and prices tend to plummet during July.
During last week the average U.S NG consumption rose by 2.27%.
The power sector led the rally with a 7.11% rise. The total demand for NG was 2.21% above previous week's levels; further, it was also 11.74% above the same week in 2011. This means, the higher than normal average temperature (on a national level) is keeping the demand higher than last year.
From the Supply side during last week the gross natural gas production also rose by 0.94%; it was 3.86% above the production level in 2011. Imports from Canada increased by 1.03% (week-over-week); the imports were also 28.15% higher than during the same week in 2011. This means the growth in demand is being supplied by the growth in imports. During last week, the total U.S natural gas supply increased by 0.96%. Finally, the natural gas rotary rig count decreased by 3 and reached 562.
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 the demand was still slightly higher than the growth in supply. So it means the natural gas market has gotten a bit tighter compared to its state a week earlier.
Natural gas injection to the underground natural gas storage was lower than the injection during the parallel week in 2011 by nearly 36 Bcf. Further the injection was also 22 Bcf lower than the 5-year average injection. The current storage is at 3,006 Bcf for all lower 48 states, which is still nearly 27.1% above last year and 5-year average. This is a decline because the storage levels were a few weeks back around 35% above the 5-year average; if the demand will continue to rise by a higher rate than the supply, the gap between the current levels and the historic levels will close. At this rate the storage levels will peak around November at 3,900.
Keep in mind that the low injections aren't something new. During the past few weeks the NG injections were lower than the 5-year average injection by an average of 34 Bcf. Therefore the recent low injections shouldn't have caught anyone by surprise and thus shouldn't have had such an effect on natural gas price. But since prices gone up, it means the natural gas market is getting tighter. The question is whether this change is long or short term. I suspect the market has already made its correction for the lower than normal injections.
So what does it mean for the near future?
If natural gas price will continue to rise it could mean this rally is related to a seasonality effect, warmer than normal weather and pipeline infrastructure constraints in the Northeast. If these factors won't last long they could bring natural gas price down again or at least keep it from further rising.
For further reading: What's Up with Natural Gas? Nothing Much
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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