3 Factors That Could Bring Down Natural Gas Prices

After rallying over the past few months, here are three ways that we could see the natural gas market cool off.

May 16, 2014 at 9:04AM

Investors in United States Natural Gas (NYSEMKT:UNG), a leading ETF that follows the price of natural gas, have benefited from the strong performance of natural gas in the past several months. Now that the winter is slowly turning into spring, what is keeping the price of natural gas so high? What could bring it back down to below $4? Let's examine the recent developments in the natural gas market and offer three factors that could bring down the price of natural gas in the coming weeks. 

Rise in storage
In the past several months, the working natural gas underground storage plummeted to its lowest level in over a decade. Back at end of March, the storage level reached 822 Bcf, which was more than 50% below the five-year average. One of the reasons for the drop in storage was the spike in demand in the residential and commercial sectors. Earlier this year, the harsh weather has increased the demand for natural gas for heating purposes.

In the past several weeks, however, the natural gas storage level has started to rise. This has slowly brought down the price of natural gas.

The chart below shows the change in natural gas storage and the price of natural gas in recent months.

Nat Gas May

Source of Data: Energy Information Administration   

If the natural gas market cools down, it could hurt leading natural gas producers such as Chesapeake Energy (NYSE:CHK). In the most recent quarter, the company benefited from the elevated price of natural gas,with its revenue growing by over 20% year over year. This high growth rate is likely to come down in the coming quarters as the price of natural gas drops. Since natural gas accounts for more than 50% of its sales, and the company doesn't expect to substantially increase its natural gas production in 2014, the potential price cut could impede Chesapeake Energy's growth in total sales in future quarters. 

Fall in demand for natural gas 
During the first couple of months of 2014, demand for natural gas in the residential and commercial sectors grew by 16% year over year. These two sectors combined account for nearly 50% of total U.S. consumption. The harsh winter conditions are behind most regions in the U.S., however. As a result, the demand for heating is likely to further subside in the coming months. This should correspond to a dip in natural gas consumption in both of these sectors. 

The power sector accounts for roughly 20% of total natural gas consumption. During the first couple of months of 2014, the demand for natural gas in this sector slightly rose by 1.7% as compared to the same time last year. This trend is likely to change course in the near future, however, as high natural gas prices are likely to slowly reduce the demand in this sector, according to the Energy Information Administration .

Rise in production
The EIA also reported a 3.3% year-over-year rise in the natural gas production during January and February. It estimates that production will further rise by 3% during 2014. If the trend continues, this could increase injection levels to storage and further cool down this market. 

Natural gas is likely to come down from its highs in the coming months. The rise in storage due to the decline in demand and ongoing rise in production could bring the price of natural gas below $4. As a result, Chesapeake Energy and other natural gas producers are likely to see smaller margins and lower growth in sales in the coming quarters.

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