Decoding the Natural Gas Rally

Natural gas futures are up another penny this morning at $3.77. That's up from $2.409 on September 4. From MarketBeat:

Natural gas has soared more than 40% in just a few days. Early this afternoon at the New York Mercantile Exchange, natural gas futures were up 9.8% to $3.65 per million British thermal units.

But it remains a rally in search of a reason, as almost nothing fundamental has changed for the commodity.

There’s still a glut of gas supply in the U.S., currently 17% more in storage than last year. Temperatures across the country remain mild; with neither cooling nor heating needed. Directed drilling for gas didn’t fall until last week.

So what does market see in natural gas? Analysts at Barclays Capital and Raymond James & Associates say the driver for the gas rally is coal. As natural-gas prices dropped to the lowest level in seven years in early September, it dethroned “King Coal” to become a cheaper fuel source for power plants. Natural gas is still down about 40% this year.

Gas-fired electricity generation increased by 1.9% in the first half of this year, despite the 5% decline in overall power demand, according to the Energy Information Administration. Meanwhile, coal-fired electricity generation was down 12.8% through June. Coal prices have fallen, but not nearly as much....MORE