Is Natural Gas Making A Comeback?

Includes: CHK, UNG
by: Lior Cohen

The price of natural gas (short term delivery) continued its slow ascent during the previous week. The recent rise may have been driven by the sharp drop in temperatures and snowy weather in parts of the Midwest and Northeast. Despite the plunge in temperatures, the natural gas storage depletion rate was slower than in the five year average. Will natural gas prices continue to rise? Let's examine the recent developments in the natural gas market.

During last week, the future price of Henry Hub (short term delivery) edged up by 0.52%. Conversely, United States Natural Gas (NYSEARCA:UNG) edged down by 0.5%. As of last week, the Henry Hub future prices were nearly $0.23 per mil. BTUs above natural gas price for the same week in 2011. The recent rise in the price of natural gas, may have contributed to the recent rally of major natural gas and oil producers' stocks such Chesapeake Energy Corporation (NYSE:CHK). During last week, shares of the company declined by 4.4%. If natural gas continues to trade up it could raise the expected revenues of Chesapeake and thus positively affect the stock price.

The chart below presents the developments in the price of natural gas during the past couple of months. As seen, the downward trend of natural gas prices halted in recent weeks.


According to the recent EIA weekly update, the underground natural gas storage decreased by 72 Bcf and reached 3,652 Bcf. In comparison, the storage declined by 81 Bcf during the same week last year, and by 131 Bcf for the average five years. The current storage for all lower 48 states is 12.8% above the 5-year average and 2.3% above last year's storage. Moreover, the table below shows the changes in storage during November and the first few of weeks of December (for eight weeks) in the past five years. As seen, the average extraction in 2012 is similar to 2011's but well below the extraction in the preceding years. If the storage will continue to fall at a slower rate than in the previous years, this could pull down natural gas prices.

So the gap between recent year's storage levels and current storage has expanded. Thus, following the recent extraction the natural gas storage is declining at a slower rate than in previous years.

Due to the holidays the EIA published only its storage report sans the changes in the supply and demand.

According to a recent report, the natural gas rotary rig count edge up by 2 and reached 431 rigs, according to Baker Hughes. The rig count is still very low and is nearly 47% lower than the same week last year. The recent slow rise in number of rigs could suggest a slowdown in the contraction in natural gas production.

Is The Contango Slowly Rising?

The decline in the prices of natural gas during part of November and December may have been anticipated in the future markets. The chart below presents the gap between the one month ahead future price (herein: short term) and the prices of two, three and four months ahead future prices. The sharp drop in the gaps tends to occur at the end of the short term contact (i.e. at the end of each month). As the difference between the short term price and the other future contracts narrows, this suggests the market expects the spot price of natural gas will decline in the near future.

During November and December the difference among the above-mentioned contacts reached their lowest level this year so far. This could explain the drop in the prices of natural gas during parts of November and December. If the Contango will start to rise, this could suggest the market expects natural gas prices to rally.

Cold Weather in Late December

During last week, the U.S temperatures plunged. The snowy weather reached parts of the Midwest and Northeast. This snowy weather and low temperatures are expected to continue in the days to follow in above-mentioned parts of the U.S. Moreover, on a national level the heating degrees this week are projected to be higher than normal and last year. Despite the currently cold weather, the temperatures are expected to remain higher than normal in the East Coast in the weeks to follow, even though the precipitation is expected to be above normal in the East Coast.

So what's next for natural gas?

The natural gas storage decreased last week at a slower than normal pace. This could suggest the demand for natural gas is rising at a slower pace than in recent years. The cold weather is likely to pull up the demand for natural gas. But if the storage levels will remain higher than the five year average as a result of the slower contraction rate this could contribute to the downward trend of natural gas prices.

For further reading see "Will The Recent Rally of Natural Gas Help Chesapeake?"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.