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

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Natural Gas and Heating

The demand for natural gas for heating purposes was still high for the season on account for the lower than normal temperatures in the Northeast and Midwest. The heating degrees days were higher this season than in previous years. This was another indication for a high demand for natural gas for heating during March. In the coming weeks the temperatures are expected to rise, which could curb the demand for natural gas and thus pull down the price of natural gas.

Natural Gas and Electricity

The electric market accounts for nearly 40% of the usage of natural gas in the U.S.The other main energy source for electricity is coal. The sharp rise in the price of natural gas in recent weeks may steer away electricity suppliers such as Public Service Enterprise Group Inc. (NYSE:PEG) from natural gas to other resources. The company (opens pdf file) produces electricity by using natural gas, nuclear power and coal. If the price of natural gas will continue to rise, it might eventually lead these companies to switch to coal or other energy sources.

In 2012, PSEG’s natural gas share out of the total electricity it generated was 32%. This was a three percent point gain compared to the company’s usage of natural gas in 2011. Back in 2012, the price of natural gas tumbled down to $2/mcf. So the rise in usage in natural gas may have come from the drop in prices. This year, however, based on the current price of natural gas, the company might rely more on nuclear power, which accounted for 57% of its electric generation, and coal, which accounted for 11% of the company’s electric generation in 2012 (it was 15% back in 2011) rather than on natural gas. If other electric companies will shift from natural gas to other resources, the price of natural gas might come down.

Foolish Bottom Line

If the weather won’t start to heat up in the Northeast and Midwest, then the price of natural gas will continue to rally. Based on the current projections, however, the weather will remain cold in the Northeast but the heating degrees are projected to fall. This could cool down the natural gas market in the coming weeks. The sharp rise in the price of natural gas might steer away electric companies from natural gas and switch back to coal, nuclear power or other energy resource. Therefore, I think the price of natural gas might start to lose altitude and pull down in the coming weeks.

For further Reading see:

Is Chesapeake walking towards the right path?

Why the Recent Rally in Natural Gas won’t help XOM

Lior Cohen has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy Corporation (NYSE:CHK), Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy

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