01/10/14 – Australian coking coal market in lull


Summary

  • Natural gas rallied last week by 3.8%.

  • UNG has underperformed natural gas by nearly 1% during September.

  • The low storage is likely to keep pushing up natural gas prices.


Natural gas prices changed direction and rallied by 3.8% during last week. Moreover, United States Natural Gas (NYSEARCA:UNG) also rose by 3%. Will UNG and natural gas keep recovering?

In the meantime, the ongoing increase in Contango in the natural gas futures market could impede the progress of UNG compared to natural gas. For September, to-date, the price of natural gas is still down by 2%, while UNG is down by 3%. The chart below shows the changes in the normalized prices of natural gas and UNG.



Natural Gas and UNG Normallized Prices - As of Aug 25 2014

Source of data: EIA and Google Finance


So even if natural gas were to keep recovering, the rise in the Contango may result in UNG underperforming natural gas.



Storage picked up by 97 Bcf

Based on the recent EIA weekly update, the storage rose by 97 Bcf; the underground natural gas storage increased to 2,988 Bcf – nearly 11.4% lower than last year’s levels. This recent injection was 18 Bcf higher than the 5-year average injection and 10 Bcf above last year’s.

Storage picked up by 97 Bcf

Source of data: EIA


Even though the injection to storage was slightly higher than last year, it may not be enough to bring the storage to its normal levels by November. The changes in the demand and supply impact the progress in the injection to storage.



Demand-Supply

During the previous week, the supply contracted by 0.7%, mainly due to a decline in gross natural gas production, which was slightly offset by higher imports. Nonetheless, based on Baker Hughes’ latest weekly update, the natural gas rotary rig count increased by 9 rigs to 338 rigs – they are still down by 10% compared to 2013.

From the demand side, the average U.S natural-gas total demand dropped by 4.9% (week-over-week). Most of the decline was related to lower consumption in the residential/commercial sector.

The changes in the supply and demand suggest the natural gas market has loosened further last week as the gap between supply and demand slightly widened. This change in the natural gas market didn’t stop prices from slightly recovering.



Seasonal change

The currently weekly price of natural gas isn’t far off the price of natural gas recorded back in 2011 and 2010, as indicated in the chart below.

Weekly Prices of Natural Gas In July - October 2009-2014

Source: EIA


In certain years (including 2012 and 2013), the price of natural gas remained relatively flat between July and September. This year, the price of natural gas slightly declined in the past few months. But in October, as some may expect, prices that were relatively high came down, while prices that were low picked up. So the big differences among the prices in different years contracted by the end of October. This is a small sample, and past performance is no indication of future performance. Moreover, I think the main concern remains the low storage levels, which could keep the price of natural gas from falling down to its normal price range in October.

The table below shows the storage levels in the past few years. As you can see, the storage this year is still very low for this time of the year. Even though the gap is slowly closing, it’s still wide enough to keep natural gas from falling to a range of around $3.5.


Weekly Storage Levels of Natural Gas in July-September 2009-2014

Source: EIA


Weather

In the next couple of weeks, the weather forecasts estimate higher than normal temperatures around the East and West coast, and lower than normal temperatures in the Midwest. Moreover, cooling degrees days are expected to be above normal. The general higher than normal temperatures could have a modest increase in the power sector’s natural gas consumption.



Final point

The recent recovery in the price of natural gas may see some modest losses in the near term. But as we are getting closer to the extraction season, the natural gas market is likely to heat up. This means prices may resume their upward trend over the coming weeks. Finally, the ongoing rise in the Contango in the future markets should keep investors of UNG aware of a possible roll decay, which could reduce their gains from a potential rally in natural gas.


Source – SeelingAlpha.com