Is Natural Gas Heading towards $4?

The price of natural gas moved in an unclear trend during last week. United States Natural Gas (UNG) also didn’t do much during last week. According to the recent U.S Energy Information Administration weekly update, last week’s natural gas withdrawal was higher than the five year average but close to last year’s withdrawal. Will natural gas resume its downward trend? Let’s examine the recent developments in the natural gas market.

During March, the price of Henry Hub (short term delivery) inched up by 0.2%. Furthermore, United States Natural Gas also edged up by a similar rate. As of last week, the Henry Hub price was still $1.53 per million BTUs higher than its price during the same week in 2013. Last week’s modest rise in the price of natural gas may have contributed to the slight gain of shares of natural gas related companies such as Devon Energy (DVN): During last week, Devon Energy’s stock rose by 1.1%. If natural gas price resumes its downward trend, this could reduce Devon Energy’s expected sales and its valuation.

The chart below presents the changes of 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 due to the Backwardation in the futures market. This recent shift might suggest the market expectations are that the price of natural gas will resume its downward trend in the coming weeks.

The rest of this analysis is at Seeking Alpha

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