Will Natural Gas Keep Falling?

The price of natural gas changed course and plummeted below $4.8 during last week. United States Natural Gas (UNG) also decreased. Even though natural gas lost more than 3.4% since the beginning of February, the price of natural gas is still traded at a higher than normal level. According to the recent U.S Energy Information Administration weekly report, last week’s natural gas withdrawal was much higher than the five year average rate; the recent fall in demand didn’t curb down last week’s withdrawal rate. Will the price of natural gas continue to fall? Let’s examine the recent changes in the natural gas market.

During February 2014, the price of Henry Hub (short term delivery) fell by 3.4%. Moreover, United States Natural Gas also decreased by 2.3%. As of last week, the Henry Hub price was still $1.96 per million BTUs higher than its price during the same week in 2013. Last week’s drop in the price of natural gas may have contributed to the fall of shares of gas and oil producers such as Chesapeake Energy (CHK): During last week, Chesapeake‘s stock sharply decreased by 8.6%. If natural gas price continue to decline, this could cut down Chesapeake‘s expected sales and may slightly reduce the company’s valuation.

The chart below presents the developments in the price of natural gas and UNG in past six months. Prices are normalized to July 31st, 2013. As seen, UNG has under-performed natural gas by roughly 8.9 percentage points due to Contango that led to roll-decay.

The rest of this analysis is at Seeking Alpha

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