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As Prices Slip, Natural Gas Supply - and Demand - Are Up

Stocks in this article: UNG CHL RRC SWN BHI

NEW YORK (TheStreet) -- Warm weather has put a chill in natural gas prices for investors in recent trading.

But today's release of natural gas inventories by the United States Energy Information Agency could reverse the recent downward price trend. In premarket trading, United States Natural Gas  (UNG), the main exchange traded fund for natural gas, was up nearly 2.50%.

Last Thursday, the Energy Information Agency reported that natural gas inventories increased 38 bcf (billion cubic feet) for the week ended Oct. 25. That brought current inventories to 3,779 bcf, above the predicted level of 34 bcf. As a result of the greater supply and lower demand than expected by the analyst community, natural gas prices dropped that day from 3.62 per MMBtu (millions of British thermal units) to 3.58.

The impact was naturally seen in natural gas securities, too.

Over the last week of market action, United States Natural Gas has cratered by more than 3.6%. Over that same period, Chesapeake Energy  (CHK) fell by over 6.8%.   Southwestern Energy  (SWN), by 2.32% and Range Resources  (RRC), by 3.98%, have plunged, too.

Overall, United States Natural Gas is off for the last week, month, quarter, six months, and year of market action. It is the same story for energy across the globe now, due to the warmer weather: Brent crude is down to its lowest levels in four months due to mild temperatures in Europe. The East Coast in the United States is enjoying a pleasant outlook, with temperatures predicted well into the 60s for New York City today. Last winter was the coldest in decades for much of China and India, but this year is shaping up to be much warmer.

As a result, on Monday natural gas futures dropped by almost 2% to the lowest level since mid-August.

"Two more weeks of warm [temperatures], especially in Texas, and this could really let more gas out of the December contract," noted Richard Hastings, with Global Hunter Securities.  Phil Flynn, a senior market analyst at Price Futures Group, reported that the market had "big selling overnight as weather forecasts fail to live up to expectations."

Due to the warm weather, the supply of natural gas rose.

For the United States, there was a 0.8% increase in the supply from the week before. The natural gas rotary rig count also fell by 16 to 360, according to the weekly report from Baker Hughes (BHI). That is a 15% decline from the number of rigs operating in 2012. Of hope to those long on natural gas is that the recent United States Energy Information Administration report on natural gas storage was lower than the five-year average.

Demand for natural gas is increasing, however.

As a result of its falling price, the use of natural gas is on the rise. It has replaced coal in many power plants in the United States. On a weekly basis, consumption by American customers just increased by 4.9%. Consumption of natural gas is also 4.5% higher than that for the same week in 2012. In the short term, the overall demand for natural gas increased by 5.2% on a weekly basis.

Unlike oil, there is a wide disparity in natural gas pricing around the world. Production costs have fallen greatly due to fracking, with some now calling it "plumbing" rather than "drilling" for fossil due to the improved technology. As a result, the increasing demand is not raising prices for natural gas. But the premarket activity for United States Natural certainly indicates there could be a bullish report for the commodity coming out from the Energy Information Agency at 10:30 ET this morning.

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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