Will Natural Gas Remain Above $4?

The natural gas continued to cool down during last week. United States Natural Gas (UNG) also tumbled down during the previous week. According to the recent U.S Energy Information Administration weekly report, last week’s natural gas withdrawal was higher than the five year average but lower than last year’s extraction. Will natural gas keep cooling down? Let’s examine the recent changes in the natural gas market.

During March, the price of Henry Hub (short term delivery) declined by 2.5%. Furthermore, United States Natural Gas also slipped by 2%. Nonetheless, as of last week, the Henry Hub price remained $0.6 per million BTUs higher than its price during the same week in 2013. Last week’s fall in the price of natural gas may have contributed to the slight descent of shares of some natural gas producers including Chesapeake Energy (CHK): During last week, Chesapeake Energy’s stock decreased by 1.5%. If natural gas price continued to tumble, this could reduce Chesapeake Energy’s valuation.

The chart below presents the developments in the prices of natural gas and UNG in past several months. Prices are normalized to November 29th, 2013. The chart shows that UNG has out-performed natural gas by roughly 16.4 percentage points because of the Backwardation in the futures market. This situation might suggest the market expectations are that the price of natural gas will drop further in the near future.

The rest of this analysis is at Seeking Alpha

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