The natural gas market is showing signs of recovery as the price of natural gas rallied in recent weeks. Does this mean natural gas will continue to rise? Or will natural gas changes course and fall in the near future? How will the developments in the natural gas markets affect leading oil and gas companies including Chevron (NYSE: CVX) and Chesapeake Energy (NYSE: CHK). Let’s examine the recent changes in the natural gas market to figure out what’s up ahead.
During February, the price of natural gas rose by 4.4%. Moreover, the natural gas ETF United States Natural Gas (NYSEMKT: UNG) also increased by 2.9%. If the price of natural gas will change course, then UNG is likely to follow and also decline. So what’s up ahead for natural gas?
The natural gas storage remains higher than the five year average by nearly 16% but due to the rise in extraction rate in recent weeks the storage was 12% below last year’s storage levels. During February, the withdrawal from storage was 573 Bcf. In comparison, during February 2012 the withdrawal was 455 Bcf. Last year, however, was among the hottest winters in recent years. If the amount of natural gas withdrawn from storage is an indication for the demand for natural gas, then the demand for natural gas this season is higher than in 2011/2012 but lower than in previous years. Moreover, as long as the natural gas storage remains higher than the five year average, the price of natural gas is likely to remain much lower than the five year average.
The chart below shows the development of the underground storage and average weekly price of natural gas.
According to recent EIA monthly report, the total production declined in December by 1.1%. The recent drop in production may have contributed to the short term rally of natural gas. But in the coming months the production is expected to rise as the shale gas will continue to rise. The expected rise in production may adversely affect the revenues growth and operating profitability of leading oil and gas producers.
Chesapeake is the second largest natural gas producer in the U.S and the portion of the natural gas operations is a substantial portion of the company’s net revenues. The company’s expected production of natural gas in 2013 will account for nearly 60% of its revenues. This means for every 1% drop in the price of natural gas from the company’s current expected annual average of $3.67/mcf, the net revenues from oil and natural gas will decline by nearly 0.6%.
Chevron, on the other hand, natural gas account for a much smaller portion from its total revenues. This means the changes in the price of natural gas will have a lesser effect on its total revenues compared to Chesapeake. Despite this lower exposure to natural gas, the company’s revenues fell during 2012 by 4.6%. On the other hand, the company’s operating profitability rose from 18.7% to 19.1%.
Heating & Electricity
The two main industries for using natural gas are generating electricity and heating.
In regards to electricity, The strong correlation (0.35) between the price of coal and natural gas suggests that if natural gas will continue to rise, the price of coal will also follow and vice versa.
In regards to heating, up to now the winter was colder than last year. If the winter will continue in the coming weeks and the temperatures will remain lower than normal, this could lead to a rise demand for natural gas. Therefore, the demand for natural gas might pick up in the coming weeks.
The liquefied natural gas market is still developing. As the shale gas production will continue to rise, the U.S will be able to develop its export business of LNG. Cheniere Energy (NYSEMKT:LNG) is currently the only company that is allowed to export LNG. This company has yet to show growth in revenues and according to analysts this company might only start showing substantial growth by 2015. Nevertheless, during 2013, shares of the company rose by 18.3%. This company’s rally is mostly driven by the company’s potential growth and not its actual performance. After all, the company’s revenues fell by 8.3% during 2012.
Natural gas prices might continue to pick up in the coming weeks especially if the winter will linger and the demand for heating will remain robust. The demand for natural gas for generating electricity is also a factor that could pull up the price of natural gas. On the other hand, the supply for natural gas is expected to rise and storage to remain higher than normal. This will keep natural gas from rising to the $4 mark.
For further Reading see:
- Will Natural Gas Fall to $2?
- Why Coal Isn’t Going Anywhere
- Will Natural Gas Remain Low in 2013?
- Is Chesapeake walking towards the right path?
- Why the Recent Rally in Natural Gas won’t help XOM
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