Natural gas prices outlook for February 2011

Natural gas spot price (Henry Hub) has been behaving erratically in the last couple of weeks, with high rises, followed by deep falls. When will we start seeing natural gas spot price falling? What does the past could, if any, tell us on the seasonality of natural gas and its price behavior in the upcoming month of February 2011.

To answer these questions, I will examine the seasonality of natural gas spot price in the past, and its correlation to natural gas consumption in the US.

During the last several months of 2010 natural gas prices increased. The following table shows the price changes and the upward trend across the board for all major natural gas – energy commodities. In January, however, there is decline in the steep rise.

natural gas spot price and future November 2010- January 2011

*Monthly average prices; Source: EIA website

By examining these figures on a multi year scale, as presented in the table below, which only accounts for natural gas spot price (Henry Hub), it shows that the average price of December rose by 12.5% during the last 13 years, while in 2010 (in the table above) it increased by 14.5% – similar.

Natural gas spot price average 1998-2010

*Monthly average prices; Source: EIA

On the other hand, during January 2011, so far, the Henry Hub rose by 6.3% while the average price in January (1998-2010) decreased by 8.3%. This could be because of late arrival of winter time this year.

Nonetheless, consider that the current natural gas spot price (Henry Hub) during January 2011 price is 4.516, which is 1.7% below the historic figure. This is probably because of the vast natural gas findings in the US during 2009-2010, which brought the price pressure down.

In order to asses the validity of natural gas seasonality, we will need to check how related the consumption of natural gas to its price:

natural gas price chart  vs consumption 2001-2010

*Monthly average prices; Source: EIA website

The natural gas price chart above shows its changes compare to natural gas consumption during the years 2001-2010.

The chart below shows the natural gas spot price correlation to natural gas consumption during the years 2001-2010 (monthly percent changes).

natural gas spot price Correlation with Consumption 2001-2010

Source: EIA

These two natural gas price charts show that there is seasonality for natural gas consumption, as expected – during winter months the consumption rises; there is also a strong positive correlation between price and consumption mainly in the last couple of years (2009-2010).

Nonetheless, there were years in which this correlation was very low (e.g.  2004, 2005, 2007), and during 2008 there was a strong negative correlation of -0.35, which was probably due to the energy crisis when oil prices rose high and fast.

To summarize, it’s prudent not to rely heavily on the correlation between natural gas spot price and consumption, seeing that the relation is fragile and might break when other variables come into play. Consequentially, while there is some seasonality of natural gas spot price, we should be vigilant for other events that could affect it.

Therefore if I would to speculate, based on the figures above we should see natural gas spot price falling in the next several weeks, a fall that will bring it way below its multi year average price of 4.474$/mmbtu during February.

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