Will The Natural Gas Market Change Course?

The price of natural gas has spiked last week to pass the $5 mark – the highest level since June 2010.  United States Natural Gas (UNG) has also jumped during last week. The cold weather has pressured up the price of natural gas. Despite the sharp rise in demand for natural gas, the U.S Energy Information Administration reported that last week’s extraction from storage was lower than last year’s withdrawal. Will natural gas change direction? Let’s review the recent changes in the natural gas market.

During January (up-to-date), the price of Henry Hub (short term delivery) jumped by 22.5%. Furthermore, United States Natural Gas also increased by 19%. As of last week, the Henry Hub price was also $0.85 per million BTUs higher than the price during the same week in 2013. Last week’s sharp rise in the price of natural gas may have contributed to the moderate rise of shares of gas and oil producers such as Chesapeake Energy (CHK): During last week, Chesapeake‘s stock rose by 5.6%. If natural gas price continues to rise, this could slightly improve Chesapeake‘s expected revenues and may slightly improve the company’s valuation.

The chart below presents the changes in the price of natural gas and UNG in the past several months. Prices are normalized to January 31st, 2013. As seen below, UNG has under-performed natural gas by roughly 24 percentage points due to Contango that led to roll-decay.

The rest of this analysis is at Seeking Alpha

For further reading see