Will Natural Gas Prices Rebound?

Includes: PRQNF, UNG, USO
by: Bidness Etc


The Energy International Agency (EIA) released its natural gas inventory numbers for the week ended June 22, 2012, yesterday. Natural gas inventory increased by 57Bcf, while the market anticipated an increase of only 52Bcf for the week ended.

The higher than expected increase in the inventory reported for natural gas caused the Henry Hub future to slide more than 5% after the release of the EIA data report.

Rising Inventory of Natural Gas

The natural gas inventory reached 3,063Bcf for the week ending June 22, 2012. The inventory increased 27% as compared to the inventory levels of 2,410Bcf held in the same period last year; and 25% higher than the five-year average inventory of 2,450Bcf.

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Source: EIA

The data given above is in line with the recent trend observed in natural gas in the U.S.

Technological advancement with respect to the widespread use of hydraulic fracturing and horizontal drilling by producers has drastically increased the supply of natural gas in the U.S., driving prices to 10 year lows and increasing the inventory levels held.

These inventory levels are high for this time of the year when compared to historical data. The increased inventory level is an indication that the supply is higher than demand. Hence, the prices of the Henry Hub futures dipped.

Recent Price Increase

Henry Hub future prices increased more than 10% in the previous five sessions due to the widespread summer wave in the country. The warm temperature in June signaled an early start to the summer cooling season and increased prices from lows in the range of $2.15 to $2.20 during the month.

Utilities are switching to gas-fired generators to avail low prices in the current situation. As the pace of substitution picks up, the increased natural gas demand will help put a floor on gas prices in the U.S. However, in the long term a rebound in natural gas prices will be a function of LNG exports.

PETRONAS acquisition in Canada

PETRONAS recently offered to buy Progress Energy Resources Corp. (OTC:PRQNF) for $5.5 billion ($20.45/share), a 77% premium over closing price as at June 27, 2012.

PETRONAS also announced plans to build a liquefied natural gas (NYSEMKT:LNG) plant on the northern British Columbia coast in order to export 7.4 million tons a year to Asia, with the first shipment expected in 2018. This will be the third LNG plant being set up on the British Columbia coast for the purpose of exporting LNG.

This is positive for prices of natural gas in North America, since prices of natural gas are trading at a significant discount to prices internationally, where prices are trading at highs due to price linked to oil and increased demand from Japan (after its nuclear plant shut down) and South Korea.

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Investors can use the Natural Gas ETF (NYSEARCA:UNG) to play the long term trend in natural gas prices. Natural gas prices will also benefit as the ratio between the UNG and Oil ETF (NYSEARCA:USO) reverts towards the mean.

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

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