Will Natural Gas Bounce Back?

The price of natural gas has tumbled down last week.  United States Natural Gas (UNG) has also followed and plummeted. Nonetheless, due to very low temperatures mainly in the Northeast and Midwest, the demand for natural gas spiked last week. Based on the latest U.S Energy Information Administration weekly report, last week’s extraction from storage was higher than the previous week’s extraction and the five year average withdrawal. Will natural gas bounce back? Let’s analyze the recent developments in the natural gas market.

During January (up-to-date), the price of Henry Hub (short term delivery) decreased by 4.2%. Furthermore, United States Natural Gas also fell by 4.25%. As of last week, the Henry Hub price was $1.18 per million BTUs higher than the price during the same week in 2013. This month’s decline in natural gas price may have contributed to the drop of shares of gas and oil producers such as Chesapeake Energy (CHK): During last week, Chesapeake‘s stock fell by 2.7%. If natural gas price continues to fall, this could cut down Chesapeake‘s expected revenues and may slightly reduce the company’s valuation.

The chart below shows the changes to the price of natural gas and UNG in the past several months. Prices are normalized to January 31st, 2013. As you can see, UNG has under-performed the price of natural gas by roughly 15.8 percentage points due to Contango that led to roll-decay.

The rest of this analysis is at Seeking Alpha

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