Will Natural Gas Continue To Fall?

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Includes: UNG
by: Lior Cohen

During last week, natural gas prices declined again. The prices fell precipitately on Friday when the future and spot prices plunged by 6.1% and 4.05%, respectively. Will this downward trend continue in the weeks to follow or was it just another long squeeze? Let's examine the recent developments in natural gas markets to try and answer this question.

During last week the price of Henry Hub (spot) declined by 3.1%; the future price (short term delivery) also decreased by 3.8%; United States Natural Gas (NYSEARCA:UNG) price decreased by 3.9%. The chart blow shows the rise and fall of the Henry Hub spot and future (short term delivery) prices during July and August.


(Click to enlarge)

Supply

From the Supply side, the gross natural gas production declined by 0.4% during last week; it was still 2.2% above the production level in 2011. Imports from Canada increased by 1.3% (week-over-week); the imports were 1.2% below the imports recorded during the same week in 2011. The total U.S natural gas supply declined on a weekly scale by 0.26%. Finally, the natural gas rotary rig count decreased by 7 and settled at 498 rigs. Therefore, the NG supply slipped during last week.

So the natural gas supply moderately declined while the demand rose during last week. Thus, the natural gas market has tightened a bit compared to its state a week earlier.

Storage

Natural gas injection to the underground natural gas storage was very similar to the injection during the parallel week in 2011 - it was back then 25 Bcf. Nonetheless, the injection was 21 Bcf lower than the 5-year average injection. The current storage is at 3,241 Bcf for all lower 48 states, which is still nearly 13.5% above the 5-year average. The difference between the current storage levels and 5-year average storage continues to shrink; at the current rate the gap could nullify, based on my rough estimate, around October.

Demand

According to the EIA, the average U.S. NG consumption rose by 0.7% during last week. The industrial sector led the rally with a 1.5% gain (week over week). Many other sectors' demand for NG also increased during last week. The total demand for NG increased by 0.8% compared with the previous week's levels; it was also 3.4% above the demand during the parallel week in 2011. Thus, the demand slightly increased compared to the previous week.

Warmer than Normal Weather Continues

The weather remains warmer than normal but was slightly less hot than in recent weeks. There are projections this hotter than normal weather will subside in the weeks to come, which will pressure down the demand for natural gas in the power sector. During last week the U.S. temperatures (on a national level) were higher by 2.0 degrees than the 30-year normal temperature but 2.0 degrees cooler than the same week in 2011. The hotter than normal weather is keeping the demand for natural gas high compared to the same time last year.

Seasonality

Natural gas prices tend to fall during August: the Henry Hub spot price fell by 8.9% during August 2011, by nearly 16.6% during August 2010, by 39.1% during August 2009, by 17.7% during August 2009, and so forth; I think you get the picture. This means if this pattern - of the Henry Hub falling during August - will continue this year, it could suggest natural gas prices will continue to fall during the weeks to follow.

So what does it mean for natural gas?

Based on the recent developments in the natural gas demand and supply, it seems the natural gas market has gotten a bit tighter: the demand for natural gas is still rising while the supply is falling; the natural gas rig count continues to fall; the injections continue to be lower than the 5-year average. These factors may keep natural gas prices from falling to the $2 mark in the near future. On the other hand, the warmer than normal weather is expected to subside; there could be a seasonality effect during this month as it was during August of previous years. These factors will probably play a significant role in pressuring down natural gas prices.

The bottom line, I guess natural gas will continue to fall if the weather will become cooler and the demand won't rise as much as it did during July.

For further reading: Will Natural Gas Resume Its Rally?

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