Chesapeake Energy Corporation (CHK), United States Natural Gas Fund, LP (UNG): Is The Price of Natural Gas Heading to a New High?

The price of natural gas continues to rally. Will its rally end anytime soon? How will the recent recovery of the price of natural gas affect leading oil and gas producers such as Chesapeake Energy Corporation (NYSE:CHK). Let’s analyze the latest developments in the natural gas market and examine what’s next.

During March and April (up to date), the price of natural gas spiked by 22.2%. Moreover, the natural gas ETF United States Natural Gas Fund, LP (NYSEMKT:UNG) also sharply increased by 21.1%. If the natural gas market continues to heat up, then United States Natural Gas Fund, LP (NYSEMKT:UNG) is likely to follow and keep rising. So, will the natural gas market keep heating up?

Storage

The natural gas storage fell below the five year average in recent weeks after it was higher than the average in the past couple of years. The current storage is almost 4% below the five year average. The sharp fall in storage was stemmed by the higher than normal withdrawal rate for this season. During March and April (up to date), the withdrawal from storage was 410 Bcf. In comparison, during the same time frame in 2012 the total injection was 54 Bcf. Last year, however, was among the hottest winters in recent decades, which could explain the short extraction period. If the natural gas extraction rate from storage is an indication for the demand for natural gas, then the demand this season is higher than in previous years.

The chart below presents the development of the underground storage and average weekly price of natural gas.

Production

According to recent EIA monthly report, the total production declined in January by 0.9%. The drop in production may have contributed to the recovery of prices of natural gas. As of last week, the U.S production slightly declined (week-over-week). If the production will continue to dwindle, it could eventually pressure the price of natural gas to rise. The ongoing decline in the production may adversely affect the growth in sales of leading gas producers.

Chesapeake Energy Corporation (NYSE:CHK) took a beating from the sharp drop in the price of natural gas during 2012. The company’s natural gas sales in 2012 fell by 36%. The fall in sales led the company to a cash flow problem that Chesapeake Energy Corporation (NYSE:CHK) still faces today.

Despite the drop in sales in 2012, the company’s natural gas production rose last year by 12%. This year, however, the company updated its natural gas production: the production is expected to fall by roughly 5% to 5.5%. Perhaps the recent rally in the price of natural gas will lead the company to augment its production as the year will progress. Moreover, the company’s expected annual average of $3.67/mcf, which is nearly 13% below the current price of natural gas. If the price will remain above the $4/mcf, the company’s outlook will be revised upward. Let’s turn to the recent developments in the demand for natural gas.