Is Natural Gas Reheating?

The natural gas rallied during last week. United States Natural Gas (UNG) also rose during last week. According to the latest U.S Energy Information Administration weekly update, last week’s natural gas extraction was higher than the five year average but much lower than last year’s extraction. Will natural gas continue to recover? Let’s analyze the recent developments in the natural gas market.

During last week, the price of Henry Hub (short term delivery) rose by 4%. Furthermore, United States Natural Gas also increased by 4.25%. Furthermore, as of last week, the Henry Hub price also $0.38 per million BTUs higher than its price during the same week in 2013. Last week’s rally in the price of natural gas may have contributed to the slight recovery of shares of some natural gas producers including Devon Energy (DVN): During last week, Devon Energy’s stock rose by 2.7%. If natural gas price continues to rise, this could increase Devon Energy’s valuation.

The chart below shows the changes in the prices of natural gas and UNG in past several months. Prices are normalized to November 29th, 2013. The chart presents that UNG has out-performed natural gas by roughly 17.1 percentage points due to the Backwardation in the futures market. This situation implies the market expectations are that the price of natural gas may descent in the coming months.

The rest of this analysis is at Seeking Alpha

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