The natural gas prices continued to sharply decline during most of November. But by the end of the month, the natural gas spot price bounced back and sharply increased. The same goes to the natural gas future price (short term December delivery) that changed direction on the last few day of the month and sharply rose.
What is up ahead for U.S. natural gas prices in December? Let’s analyze the changes in the natural gas during November 2011 and provide an outlook for natural gas prices for December 2011:
Natural Gas November 2011- Analysis
Let’s first check what occurred to natural gas prices (Henry Hub) in November: the Henry Hub natural gas spot and future started the month with no clear path as they have shifted from falls to rises very rapidly. The Henry Hub natural gas started to pick up and rose during the second part of the month as the temperatures throughout the U.S. mainly in the East coast started to fall and the demand for natural gas for residential purposes picked up.
By the end of the month, the Henry Hub spot slightly declined by 3.01% and the future sharply declined by 9.67%.
Let’s divide November into two parts as in the table below: from 31/10 to 21/11 and from 21/11 to 30/11; during the first part of November, the Henry Hub spot sharply plummeted, and the same goes to the future (December delivery); during the second part of the month, the Henry Hub spot and future prices sharply rose by 20.32% and 4.41%, respectively. The table below summarizes these findings:
The next table shows the average natural gas spot price, future price of Henry Hub (November delivery) and New York City Gate Spot price. During November, the average Henry Hub spot price declined by 9.6% compared with October’s average price. Future prices of Henry Hub (December delivery) also declined by 1.9%.
Natural Gas Price Outlook for December 2011
The average natural gas future prices (short term) between 1998 and 2010 are presented. It shows that future prices (short term) used to decline by 1.2% during November (December delivery). In December the average future price (January delivery) sharply rose by 12.5%. Since there was a 1.9% decrease in the average price in November, there might be an increase during December 2011 as was the case in previous years. Furthermore the pattern of a shift from a downward trend during the first few weeks of November to an upward trend during the last week of part of November as presented above might occur again in December.
I speculate natural gas price will decline during first part of the month but will also sharply rose during the second part of December. This seasonal effect also depends on the weather: as the weather will get colder mainly in the East coast, the demand will tend to increase and will start to pressure natural gas prices to rise. Furthermore, the high oil prices (they are currently near $100-105/bbl) are likely to keep the demand for natural gas robust mainly in the electricity sector in the U.S.
The correlation between the one period lag of the median of the daily contango/backwardation (column C), and the Henry Hub monthly percent change (column E) is 0.69. This is a very strong positive linear correlation. But didn’t come through in November 2011 because the market expected the natural gas spot price to rise and instead its average price fell in November.
One interpretation for this finding is that if the median of the gap between short term future price and spot price is in contango (i.e. the median of the daily gap between future price and spot price is positive so that most of the time spot was lower than future ) then the average Henry Hub spot is likely to rise in December. The intuition behind this finding is that if the market values the future more than the spot , then the market is likely to pay more the following month for this commodity, resulting in its spot price rising.
Since the median of the difference between future price of Henry Hub and spot price was only in contango during the month with a median of $0.32/mmbtu, this finding might indicate that the market estimates (all things being equal) that the average Henry Hub spot price will rise during December. The last time there was such a high Contango level, was back in December 2010 when the median of the daily contango was $0.33. Back then the average natural gas price rose by 14.4%.
In conclusion, we might continue seeing a business cycle movement as we did in recent months, but on average, it seems that natural gas prices will increase in December compared with November’s prices. Furthermore, the seasonality effect might also play an important role as the weather will get colder and the demand for natural gas in the residential sector will increase. That being said, since the natural gas storage is very high compared to recent years’ storage levels, it is likely that the natural gas prices will rise by a lesser rate than in December 2010.
Appendix – Additional News Items
There are several reports that might have affected NG prices during November and could affect natural gas in December:
Housing starts index – in the November report this index showed a 0.3% decrease in October compared with September’s; this index is suppose to be negatively correlated with NG; the report was published on November 17th while natural gas rose upon publication; if this report will show a further decrease it might pull up natural gas (the next report will be published on December 20th);
US Consumer Confidence Index – the U.S. consumer confidence sharply rose in November; this index is suppose to be positively correlated with NG price; therefore, the news of this index might help rally the NG during December if the index will continue to rise (the next report will be published on December 27th);
ISM manufacturing survey – this index (which was published at the beginning of December) sharply rose in the recent report by 1.9 percent points compared to previous month; this index is suppose to be negatively correlated with NG prices (a lagged effect). Thus, it might have contributed to the decrease in NG prices at the beginning of December (the next report will be published on January 3rd).
In any case, these reports had little effect on natural gas during November, and are likely to continue having little effect in December; therefore one should take the effects of these news items with a grain of salt as they might only have a strong impact on natural gas prices in case of shocking and unexpected news.
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