Is Natural Gas Expected to Fall Further?

The price of natural gas changed course and fell during last week. United States Natural Gas (UNG) also plummeted during the previous week. According to the latest U.S Energy Information Administration weekly update, last week’s natural gas extraction was much higher than the five year average and last year’s withdrawal. Will natural gas continue to trade down? Let’s analyze the recent developments in the natural gas market.

During this month, the price of Henry Hub (short term delivery) dropped by 4%. Moreover, United States Natural Gas also tumbled down by a similar pace. Nonetheless, as of last week, the Henry Hub price was still $2.5 per million BTUs higher than its price during the same week in 2013. Last week’s plunge in the price of natural gas may have contributed to the slight fall of shares of natural gas related companies such as Chesapeake Energy (CHK): During last week, Chesapeake Energy’s stock decreased by 3.1%. If natural gas price continued to fall, this could cut Chesapeake Energy’s expected sales and its valuation.

The chart below presents the shifts in the prices of natural gas and UNG in past several months. Prices are normalized to September 30th, 2013. As you can see, UNG has out-performed natural gas by roughly 10 percentage points because of the Backwardation in the futures market. This recent current situation might suggest the market expectations are that the price of natural gas will decline further in the coming weeks.

The rest of this analysis is at Seeking Alpha

For further reading: