The natural gas market has been cooling down in recent weeks as the price of natural gas has been declining. Will natural gas further decline? Will it fall below the $3 mark? How will the recent developments in the natural gas market affect leading natural gas companies such as Northeast Utilities System (NYSE:NU). Let’s examine the recent developments in the natural gas and liquefied natural gas markets and see what is up ahead.
Natural gas price is falling
The weakness of natural gas in recent weeks is also reflected in the sharp fall of United States Natural Gas (NYSEMKT: UNG). During the month, UNG declined by 10.6%. This ETF follows the price of short term natural gas futures that are traded in NYMEX. As of June 27th, the fund’s net assets reached $838 million. Keep in mind the ETF isn’t an exact match with the price of natural gas and it has a small gap from the change in natural gas price that currently stands at 0.32%. To analyze what is next for natural gas price, let’s examine the recent developments in natural gas demand, supply and storage.
Demand and supply
Based on the U.S Energy Information Administration, natural gas consumption in the residential/commercial sector declined in recent weeks as the weather continued to heat up. Companies such as Northeast Utilities System are likely to see a sharp drop in natural gas distribution in the second quarter of 2013 compared to 2012: In the second quarter of 2012 revenues from natural gas distribution reached $2.1 billion, which represent 11% of the company’s total revenues. But this segment accounted for 19% of Northeast Utilities’ total earnings. This means, natural gas distribution is the company’s most profitable segment and is likely to fall in the coming quarters. On the other hand, the higher price of natural gas in 2013 compared to 2012 is likely to curb the drop in natural gas revenues.
Conversely, consumption in the power sector continues to rise as utilities companies keep using their natural gas stockpiles to generate electricity. On a national level, the rise in power sector consumption is keeping the total demand rising. The demand for natural gas in this sector is likely to keep rising but will be lower than last year’s. This summer is expected to be cooler than last year, which will reflect in slower rise in natural gas consumption in the coming months.
From the supply side, natural gas production continues to slowly increase. Despite the rise in production, the number of natural gas rigs continues to fall and reached 349 by the end of last week. The current number of rigs is 35% lower than last year’s rig count.
Based on the above, the ongoing rise in natural gas consumption in the power sector is likely to curb the fall in natural gas prices in the coming weeks. Moreover, as heating degrees continue to climb, demand for electricity will keep rising, which will maintain natural gas prices from tumbling down.
The storage buildup in the past several weeks was much faster than the normal pace; the gap between the current storage levels to previous years’ levels has contracted in recent weeks. During June storage buildup was 392 Bcf. In comparison, during the same time frame in 2012, the buildup was 248 Bcf. If the buildup pace will continue to pick up, this could suggest the natural gas market is loosening up.
The table below shows the gap contraction in recent weeks.
The contraction suggests the natural gas market is loosening up in recent weeks.
Liquefied natural gas in Australia
The LNG market in the U.S is slowly progressing, but outside the U.S the LNG market continues to heat up especially in Australia. According to the EIA’s recent report, Australia will be able to augment its LNG export capability by more than 200% by the end of 2020. Australia’s current LNG export capacity is 3.2 Bcf/d. By 2020, this capacity will reach 11.2 Bcf/d. This increase in capacity will eventually lead to a rise in demand for LNG in Japan, China, India, Korea, and Mexico. One of the main driving forces behind this increase in Australia’s LNG export capability is Chevron (NYSE: CVX) that develops the largest LNG project in Australia named Gorgon LNG (opens pdf) terminal. This terminal is projected to start operating by March 2015. Currently, nearly 60% of the terminal is complete. The project is expected to generate 2.0 Bcf/d of natural gas. This means, by 2015, Chevron will start seeing a rise in revenues from LNG. Such projects are likely to make LNG more common but at the same time lower the price of natural gas.
The natural gas market is likely to keep cooling down and we may see a further drop in prices in the coming weeks. But the natural gas price will remain well above the $3 mark in the coming weeks as the demand in the power sector will start to pick up.
For further Reading see:
- Why Coal Isn’t Going Anywhere
- Will Natural Gas Remain Low in 2013?
- Is Chesapeake walking towards the right path?
- Why the Recent Rally in Natural Gas won’t help XOM
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.