Natural Gas Is Poised To Move Higher After Record Consumption [United States Natural Gas Fund, LP]

April 18, 2014 12:12am NYSE:DGAZ NYSE:UGAZ

natural gas etfPrices of natural gas are poised to move higher after record consumption this past winter decreased inventory levels well below the lower end of their five-year range. Additionally, natural gas-focused drilling rigs continue to


dwindle relative to oil-focused drilling rigs. This has depressed production of natural gas and could place upward pressure on prices if the U.S. experiences warmer-than-normal temperatures this summer.

Consumption

Natural gas consumption in the United States rose to a new record this winter – averaging 90.6 billion cubic feet per day, according to the Department of Energy. Frigid weather drove total consumption up by 8% year-over-year, despite higher prices. Consumption increases were particularly strong among residential and commercial consumers, whose combined consumption rose to more than 50% of total U.S. consumption this winter.

Inventories

With moderate production coming from producers, the low inventories might not be sufficient to cushion prices in the event of an abnormally warm  summer.

According to the Energy Information Administration (EIA), natural gas inventories in the eastern region of the United States, which is the largest consuming region, are 59.1% below the five-year average. Working gas in storage was 826 Bcf (Billions cubic feet) as of Friday, April 4, 2014, according to EIA estimates. Stocks were 849 Bcf less than last year at this time and 997 Bcf below the five-year average of 1,823 Bcf.

Rigs Concentrate on Oil

The decline in natural gas inventory is due not only to strong consumption generated from the frigid winter weather but also to exploration companies that have switched their production focus to oil.

According to Baker Hughes Inc., total rig count in the US was 1,809 as of March 28, 2014. The natural gas rotary rig count totaled 318, which represents a decrease of eight rigs from the previous week and a decrease of 71 units from the same time last year. Oil rigs rose for the seventh week in a row, by 14 units to 1,487 – 133 more than last year at this time.

Natural gas rig count, as shown in the chart above, is at the lower end of the seven-year range, as oil and gas producers have moved their focus to oil production. Producers have been drawn to oil because of high prices as compared to depressed prices for natural gas. Natural gas prices at Henry Hub dropped to an annual average of $4.05 per MMBTU compared to a $6 average during the 2007 through 2009 period.

Sentiment

Positive sentiment toward natural gas prices is building as hedge fund traders purchased natural gas futures according to the most recent commitment of traders report (COT). According to the CFTC report, released for April 1, 2014, managed money increased long futures and options on futures position by nearly 14,000 contracts while reducing short position by 2,600 contracts.

Due to the inventory imbalance created by last winter’s cold spell, inventories could further erode as cooling demand takes hold this summer. That, combined with the lack of natural gas-focused rigs, could create a squeeze on the remaining supply — sending natural gas prices rising over as temperature heat up.

If you own stock in oil sands companies or are looking to, proceed with caution. Companies lacking their own extensive natural gas operations are bound to sweat with the rising temps.

by David Becker

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: United States Natural Gas Fund, LP(NYSEARCA:UNG), VelocityShares 3X Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index Excess Return(NYSEARCA:UGAZ), VelocityShares 3X Inverse Natural Gas ETN linked to the S&P GSCI Natural Gas INdex Excess Return(NYSEARCA:DGAZ)


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