Is Natural Gas Heading towards $4.5?

The price of natural gas has bounced back last week to pass the $4.3 mark.  United States Natural Gas (UNG) has also recovered from its tumble earlier this month. Looking forward, the expected decline in temperatures in the coming weeks could result in a sharp rise in demand for natural gas for heating purposes. Moreover, according to the recent U.S Energy Information Administration weekly update, last week’s extraction from storage was the highest for this season and much higher than the five year average withdrawal. Will natural gas continue to rise? Let’s examine the recent developments in the natural gas market.

During January (up-to-date), the price of Henry Hub (short term delivery) rose by 2.3%. Furthermore, United States Natural Gas also increased by 0.9%. As of last week, the Henry Hub price was also $0.87 per million BTUs higher than the price during the same week in 2013. Last week’s rally of natural gas price may have contributed to the moderate rise of shares of gas and oil producers such as Exxon Mobil (XOM): During last week, Exxon‘s stock slightly rose by 0.6%. If natural gas price continues to rally, this could slightly improve Exxon‘s expected revenues and may slightly reduce the company’s valuation.

The chart below presents the shifts in the price of natural gas and UNG in the past several months. Prices are normalized to January 31st, 2013. As you can see, UNG has under-performed the price of natural gas by roughly 18.3 percentage points due to Contango that led to roll-decay.

The rest of this analysis is at Seeking Alpha

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