Natural gas prices outlook for May 2011

Let’s examine the changes in the natural gas prices during April 2011 and try and figure out the direction in which natural gas prices will head during May 2011:

Natural gas prices April 2011- analysis

As seen in the chart below, the Henry Hub natural gas spot and future prices changed direction during the middle of April and spot price bounced back from a low level of 4.05$/mmbtu to 4.5$ by the end of the month; future price (May delivery) finished April at 4.7 $.

Natural gas spot prices future (Henry Hub) April - May 2011

The table below shows that the average natural gas spot price moderately inclined during April by 6.2% compared to March 2011. Future prices of Henry Hub (May delivery) also rose by 4.7%.

Change in natural gas prices Henry Hub, and New York City Gate spot October 2010- April 2011


Contango/Backwardation of natural gas prices (Henry Hub) April 2011

During most of the month, natural gas prices were in contango as presented in the chart below. This might serve as an indicator that natural gas prices will continue to rise in the upcoming month.

Contango  Backwardation Natural gas (Henry Hub) Future-Spot  April May  2011

In the table below are the median of the daily contango/backwardation of the Henry Hub (column B) during each month; and the Henry Hub average spot price each month (column D) and its monthly percent change (column E).

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 0.737. This is a very strong positive correlation.


Contango Backwardationin natural gas prices Henry Hub May 2011

The interpretation of this finding is that, on average, at 73% of the time, if the median of the gap between future and spot price is at contango (i.e. the median future price was higher than the median spot price during a certain month) then the average Henry Hub spot price is likely to increase in the following month.

Or in other words, if the future price is higher most of the month than the spot price, then it’s likely that in the following month the spot price will increase.

If this finding will be proven right it means that the market is consistent with its actions in the natural gas market, it could prove to be a very helpful tool in guessing (educated guess) the direction of the natural gas prices.

Demand for Natural gas

As seen in the chart below, the natural gas storage starts to pick up and incline; this suggests the weekly natural gas production is higher than the current demand for natural gas on an aggregate level. This suggests that the demand for natural gas is starting to fall.

Natural gas spot prices (Henry Hub Natural Gas storage 2011 April 22

By the end of April, the underground natural gas storage (Billion Cubic Feet) reached 1,685 billion cubic feet for all lower 48 states; the natural gas storage was 11 Bcf below the 5-year average, and 11.3% below the storage level during the same week in 2010. Natural gas prices forecast April 2011.

Natural gas outlook Short Term

The shift in direction of natural gas prices during April might have something to do with the increase in export of natural gas form US and Canada to regions that were affected by the decrease in oil and natural gas production in Libya, such as Italy and China. Until the uprising in the Middle East will slowdown and the stability to the financial markets will be restored, mainly to the oil market, the demand for natural gas, a substitute commodity (not perfect) to oil, for hearting purposes in the residential and industrial sectors will continue to be strong not only in the US but also worldwide.

In the table below are the average natural gas future prices between 1998 and 2010. It shows that future prices used to rise by 2.8% during April and during May a more moderate rise of 0.9%.


Natural gas spot prices historic figures 1998-2010

The slower than regular departure of winter in the United States puts pressure on natural gas prices because of higher than normal demand for natural gas in certain regions in the US including the Northeast (this is less evident on an aggregate level).

Considering all the factors listed above, and given the fact the US is entering spring time,  it is likely that  natural gas price will  further rise during May 2011, but at a more moderate level than it did during April.

Natural gas outlook Long term

The tsunami attack in Japan back in mid March might also play a role in the rise in demand of natural gas during May and the following months to come, and might continue to pressure world natural gas prices to rise in the near future.

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