Is Natural Gas Starting To Heat Up?

by: Lior Cohen


The price of natural gas rallied in the past few days.

The weather forecast for the next 15-20 days suggests colder weather.

Will natural gas prices keep rising or change course and fall?

After remaining low for months, the price of natural gas has started to pick up in the past few days. Within days the Henry Hub spiked by over 20% and is currently trading around $2.2. For those who took a position on the United States Natural Gas ETF (NYSEARCA:UNG), the ETF added more than 20% to its value in the past week. So what's going on with natural gas?

Weather forecasts suggest lower temperatures ahead

Temperatures remained nearly flat in the past couple of weeks, but they were still warmer than normal on a national level. This week, the heating degree days are estimated to be much lower than normal from last year. And while the weather in the West is expected to be cooler than normal over the next 8 to 14 days, it will remain warmer than normal throughout the East.

In the futures markets, there was a sharp drop in contango following the recent rise in the spot price of natural gas. This shift could imply the market isn't fully convinced prices will continue to rise in the coming months.

Source: EIA

When it comes to storage, the EIA reported last week an extraction of 32 Bcf - much lower than the five-year average. Over the next four weeks, the total withdrawal is still estimated to be below normal levels: The withdrawal is expected to reach 467 Bcf; the five-year total extraction for this time frame was 611 Bcf. Considering this data, the demand for natural gas, at least in the near term, isn't expected to pick up. But keep in mind these predictions suggest temperatures may come closer to normal levels than previously estimated. And according to Jacob Meisel, chief meteorologist at Bespoke Weather Services, the weather in the longer term models - even those for 10-15-20 days - will be colder and perhaps even lower than normal. But if these forecasts change and suddenly the long-term projections don't hold up, the price of UNG is likely to change course and fall again.

It should be noted that as the year is winding down, the financial markets are characterized by low liquidity. For UNG, however, this wasn't the case: In the past couple of days alone, the average trading volume was 22 million shares. In comparison, the daily trading volume is around 7.3 million and the last time trading volume passed 20 million was back in late January. This goes to show how the market promptly reacted to the recent possible change in weather forecasts.

Finally, as a side note, for UNG holders, at least the drop in the Contango in the future markets will mitigate the roll decay attributed to UNG.

Bottom line

Even though the weather outlook for the next several days hasn't changed by much, some expect the possible colder-than-previously-estimated weather in the coming weeks may boost the demand for natural gas - perhaps enough to maintain the recent rally in prices. The drop in the Contango suggests the market doesn't expect prices to increase more. But over the next several weeks, the extractions from storage are still expected to be low for this time of the year. And if withdrawals don't start to rise (and come close to the five-year average levels), the latest rise will reverse and natural gas prices will come back down. For more see: Has the Weakness in Oil Fueled the Decline of UNG?

Disclosure: I/we 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.