The price of natural gas changed direction and dropped to its lowest level since mid-May. The recent injection to storage was higher than normal but is the current pace enough to bring the storage close to the normal level by November? Will the price of natural gas come down below $4 anytime soon? Let's examine these issues.

During last week, the price of natural gas fell by 2.7%. Moreover, other natural gas related assets such as United States Natural Gas (UNG) and Chesapeake Energy (CHK) also decreased by 3.5% and 1.5%, respectively.

The EIA reported that last week's injection to storage was 110 Bcf; the underground natural gas storage reached 1,829 Bcf - around 31% below the 5-year average. Last week's injection was 36% higher than the 5-year average and 16% above last year's injection to storage. The table below presents the injections to storage in the past several months compared to last year's injection and the five year average injection.

Source: EIA

As you can see, in the past several weeks, the injections to storage were at least 20% higher than the 5-year average injection.

But the higher pace of injection isn't likely to be enough to bring the natural gas storage to the 5-year average level by November.

In the past four weeks, the average natural gas injection was 29% higher than the 5-year average buildup. If we assume the upcoming weekly injections to storage remain 29% higher than normal, the storage will reach around 3,400 Bcf by early November (in time for the next withdrawal season). The chart below demonstrates this outlook.

Source: EIA

The chart shows this year's changes in storage up to now (in blue) and the potential rise in storage over the coming months (in red strips), assuming the buildup remains 29% higher than the 5-year average. The red line is the 5 year average storage.

This means, by early November, the current pace will bring the storage to around 400 Bcf below the 5-year average storage. Moreover, in order for the storage to reach 3,800 Bcf by November, the 5-year average, the injection rate has to be around 70% higher than the normal injection rate. Therefore, the prices of natural gas are likely to remain higher than average for the rest of the year.

Demand-Supply

From the demand side, the average U.S natural-gas total demand rose by 1.8% (week-over-week). Most of the rise is related to the expanded demand in the power sector, which was partly offset by the decline in consumption in the residential/commercial sector.

From the Supply side, the gross natural gas supply slightly rose by 0.5% during last week; this gain was mostly due to higher imports from Canada and a modest gain in production. Further, according to Baker Hughes' latest weekly update, the natural gas rotary rig count fell by 3 rigs to reach 314 rigs.

Thus, during last week, the natural gas demand and supply slightly expanded. As a result, the EIA's supply/demand balance remained leveled with the supply remaining higher than the demand.

Takeaway

The price of natural gas dropped in the past week but the slow rise in production and modest growth in demand will keep the price of natural gas higher than normal and well above the $4 mark. Nonetheless, if the storage buildup picks up above the current pace, this may be enough to start brining down the price of natural gas even further in the coming months.