What Could Bring UNG and Natural Gas Down?

The price of natural gas and United States Natural Gas (UNG) rallied, despite the higher than normal injection to storage during last week. Moreover, during the past four weeks, the injections to storage were 24% higher than the 5-year average. Looking forward, what could bring down UNG and the price of natural gas?

During the previous week, the price of natural gas increased by 3.7%. Further, other natural gas related investments such as Chesapeake Energy (CHK) and United States Natural Gas also rallied by 3.4% and 3.7%, respectively. For the year, UNG is still up by 12 percentage points over natural gas due to Backwardation in the futures market. The current Backwardation in the future markets is demonstrated in the chart below.

The chart shows the difference between the pricing of future prices of natural gas (for the next month, for the next two month, etc.) and spot price. Whenever the lines are below the zero, the market is in Backwardation. For most of the winter time, this was the case. But the market has stabilized in the past couple of months.

Currently, the future contracts are close to the spot price. This might suggest the market’s expectations are that the price of natural gas will remain close to its current price range of $4.4-$4.7. Moreover, the EIA estimates the price of natural gas around $4.5 for the rest of the year. But this estimate has wide confidence intervals, which range between $3.6 and $6.3 by August 2014 (for 95% confidence).

 

The rest of this analysis is at Seeking Alpha

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