Is The Natural Gas Rally Coming To An End?

Includes: CHK, UNG, USO
by: Lior Cohen

During the past week natural gas prices continued to rise. This was the third consecutive week in which natural gas traded up. Despite the recent hike in natural gas prices, they are still low for the season. Last year, the price was nearly $1.81 higher than this week's price. Let's examine the recent developments in the natural gas market and try to determine if the recent upward trend in natural gas will continue.

In the last week the price of Henry Hub (spot) increased by 9.6%; also, United States Natural Gas (NYSEARCA:UNG) prices rose by 5.87%. Furthermore, since June 13, UNG has risen by 26.5%. The recent rally of natural gas may have slightly helped struggling energy companies such as Chesapeake Energy (NYSE:CHK), but since natural gas prices are still low for the season, this recent rise is still too little, too late.

Click to enlarge image.Click to enlarge

Warmer Than Normal Weather

The weather continues to be hotter than normal, mainly in the Northeast. During the last week, U.S temperatures (on a national level) were higher by 2.7 degrees than the 30-year normal temperature and 0.6 degrees than the same week last year. This hot weather is likely to be among the factors to pull up the demand for natural gas and thus keeping natural gas price rising.

Oil Prices

One factor to consider is the recent hike in oil prices on Friday and, by extension, United States Oil (NYSEARCA:USO). During the past month the linear correlation between oil and natural gas was 0.274 (daily percent changes), which is positive. This correlation, however, varies over time and should be taken with a grain of salt. If this correlation will continue to hold up and oil prices will change direction and fall again, it might pull down natural gas prices.


During the last week the average U.S. natural gas consumption increased by 1.65%.

The power sector led the rise with a 4.7% increase. The total demand for natural gas was up by 1.56% than the previous week's levels; furthermore, it was also 13.09% above the same week in 2011. This means the hot weather is keeping the demand higher than last year.


From the supply side, during the last week gross natural gas production fell by 0.73%; it was 3.18% above the production level in 2011. Imports from Canada rose by 1.17% (week over week); the imports were also 17.23% higher than during the same week in 2011. This means the growing demand is being supplied by growing Canadian imports rather than local production. During the last week, the total U.S. natural gas supply decreased by 0.72%. Finally, the natural gas rotary rig count decreased by 21 and reached 541. This means the natural gas production continues to contract.

So the supply slightly contracted while the demand moderately rose last week. That means the natural gas market has gotten tighter compared to its condition a week earlier.


Natural gas injection to the underground natural gas storage was (again) lower than the injection during the parallel week in 2011 by nearly 21 Bcf. Furthermore, the injection was also 22 Bcf lower than the five-year average injection. The current storage is at 3,063 Bcf for all lower 48 states, which is still nearly 25% above the five-year average. This is a contraction in the gap between the current storage levels and five-year average storage that was, a few weeks back, around 30% above the five-year average; if the demand will continue to increase by a higher rate than the supply, the gap between the current levels and the historic levels will continue to shrink. At this rate, the storage levels will peak around November at 3,900.

So what does it mean for the near future?

I suspect if the natural gas market will continue to tighten from the demand, supply and storage perspectives it could keep natural gas prices rising in the near future. As long as the hot weather will continue it could be among the factors keeping natural gas increasing. On the other hand, if the weather will reach normal levels it might curb or even change the recent direction of natural gas rates. Finally, if oil prices resume their downward trend, they could pull down natural gas.

For further reading, check out "Will Natural Gas Hit $3?"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.