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Price of Natural Gas Declines as Balmy Weather Continues

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Prices broke lower out of a consolidation this week as nicer weather is leading to lower utility bills.

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United States Natural Gas (NYSEARCA:UNG) broke lower out of a consolidation pattern this week as weather forecasts over the weekend showed lower-than-expected temperatures ahead. Cooling patterns are expected to hit the Midwest and Northeast over the next six to 10 days, leaving speculators betting that utilities won't need to burn as much natural gas in the weeks ahead. Natural gas prices gapped lower at the open of the week as they had to play catch-up to the weather news after the three-day weekend.

The continuation of mild summer weather in July and August could mean the start of a multi-month downtrend in the price of natural gas. The chart below shows a consolidation of prices between $24 and $28 from February, until the recent gap lower in July. Based off of the price action, further moves lower could lead the commodity ETF to trade near $18 to $20 by this fall.



Both Ultra Petroleum (NYSE:UPL) and Chesapeake Energy (NYSE:CHK), natural gas producers, have seen their share prices decline this week alongside the price of natural gas. Lower wholesale gas prices eventually lead to lower revenue and profit for gas producers.

Ultra Petroleum has trended sideways since April, as analysts believed that the winter storms were over and natural gas use would again stabilize. The price action has stayed between $26 and $30 since then, but could break lower if natural gas prices continue to decline.
 

 
Similarly, Chesapeake Energy broke higher earlier this year during the winter storms, and has actually fared better than Ultra Petroleum in recent weeks. Although weaker natural gas prices slightly brought down its share price, Chesapeake's sale of the non-core Marcellus acreage to Rice Energy Inc. (NYSE:RICE) this week has been hailed by analysts as a profitable deal. The corporate news has helped sustain an uptrend in Chesapeake's stock price.
 

 
Ultimately, however, a continued decline in the price of natural gas would be negative for both companies. It would be unwise to make negative bets on either one just yet considering weather can change and commodity prices are volatile, but if either company breaks key levels, the potential for a negative long-term position could arise.
 
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency, and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

Follow Andrew on Twitter: @MacroInsights
No positions in stocks mentioned.
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