The price of natural gas tumbled down in the past couple of weeks. Will natural gas continue to trade down? How will the recent fall of the price of natural gas affect leading natural gas producers such as Chevron (NYSE: CVX). Let’s examine the recent developments in the natural gas market and see what’s up ahead for natural gas.
During May (up to date), the price of natural gas plunged by 9.8%. Moreover, the natural gas ETF United States Natural Gas (NYSEMKT: UNG) also sharply decreased by 9.2%. The UNG ETF follows the price of natural gas. The ETF’s net assets reached by May 7th, almost $882 million. The ETF uses the natural gas short term future contracts (for June) that are traded in the NYMEX and ICE. If the price of natural gas will continue to trade down, the demand for this ETF is likely to dwindle. So let’s break down the recent developments in the natural gas market.
The natural gas storage rose below the five year average in the past several of weeks. During April the buildup in storage was 90 Bcf. In comparison, during the same time frame in 2012 the total buildup was 97 Bcf. If the natural gas buildup rate into storage will continue at a slow pace, this could indicate the natural gas market isn’t loosening up as it did in previous years.
According to latest EIA monthly update, the total production rose in February by 1.3%. The rise in production may have contributed to the drop of prices of natural gas. As of last week, the U.S production slightly fell (week-over-week). If the production will start to rise, it could eventually pull down the prices of natural gas.
Let’s examine the recent developments of leading gas producers in the past quarter. During the first quarter of 2013, the average quarterly price of natural reached $3.48/mcf, which is 38.7% higher than the average price of natural gas in the first quarter of 2012. Chevron’s realized price was $3.11/mcf – nearly 25% higher than the realized price in Q1 2012. The sharp rise in the price of natural gas contributed to the rise in revenues in this segment. Chevron’s natural gas production rose in the first quarter of 2013 by 5.8% (y-o-y) – most of the growth came from the U.S as the production that grew by 7.3%. Moreover, the natural gas sales in the U.S also increased by 8.7% in the first quarter of 2013 (y-o-y) while the sales in the international arena fell by 3.3%. Despite the rise in production and price, the company’s sales fell in the recent quarter mainly due to drop in the price of oil.
Chesapeake Energy (NYSE: CHK), unlike Chevron, had a good quarter as its revenues grew by nearly 42%. Most of the growth in revenues was due to the rise in realized prices of crude oil and natural gas. Moreover, the company’s oil production sharply increased 54% as it reached in the first quarter of 2013 9,283 mbbls. Conversely, the company’s natural gas production remained nearly unchanged at 273 Bcf compared to 271 Bcf in Q1 2012. Chesapeake projects (opens pdf) its oil production will continue to rise in 2013 compared to 2012 and will reach 37,000-39,000 mbbls – nearly 19-26% growth (y-o-y). Its natural gas production, however, is expected to slightly fall from 1,129 Bcf to 1,060-1,090 Bcf. So even if the price of natural gas will continue to fall, its effect on the company’s revenues will diminish in the coming months.
Demand for Natural Gas
Big part of the demand for natural gas came from the residential/commercial sector that reached by February 2013 nearly 50% of the total natural gas consumption. This winter was much colder than last year so that the demand for natural gas for heating purposes rose during the past several months. E.g. in February 2013, the residential/commercial sector rose by nearly 12.4% compared to the same month in 2012. But the heating degrees days are expected to fall in the coming weeks, which could lead to a decline in consumption in the residential/commercial sector. This means, the price of natural gas is likely to come down. The industrial sector’s demand fell during February by 4%. This sector accounts for 26% of total consumption.
The higher price of natural gas, which was stemmed from the higher demand for natural gas for heating purposes, pulled down the demand for natural gas in the electric power sector that accounted in February 2013 nearly 24% of the total consumption. During that month the consumption in the electric power sector fell by 12.6% (y-o-y). In 2012, 40% of the natural gas consumption went towards electric sector; this means as the year will progress the consumption of natural gas in the electric power sector is likely to rise. Companies that distribute natural gas and use it for electric generation such as Northeast Utilities System (NYSE:NU) benefited from the rise in the price of natural gas in the first quarter of 2013: the company’s electric generation earnings grew by 136% and its earnings from natural gas distribution spiked by more than 194%. The growth in sales wasn’t only due to the rise in prices but also due to the rise in operations: in the first quarter of 2013, the company’s natural gas volume of distribution sharply rose by 21.8%. The rise in operations was mostly due to the merger the company had with NSTAR Electric’s activity. Even after controlling NSTAR Electric, Northeast Utilities System’s natural gas sales grew in the first quarter was driven by the colder than last year weather. Even if natural gas will continue to dwindle, it will still remain above last year’s rate. This might suggest this year’s demand for natural gas in the electric power sector will be lower than last year’s.
Foolish Bottom Line
I think the price of natural gas will continue to come down in the following weeks, which will cut down the profit margins of leading gas producers. But I also suspect the price will remain well above last year’s low levels, which will cut the demand for natural gas in the electric power sector. Therefore, companies such as Northeast Utilities System might not have good earnings in the coming quarters.
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
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