Continued warmer weather last week weighs on nat gas prices and producers

2013.02.12 - HDD Nat GasEnlarge GraphMany of those who invest in natural gas producer stocks such as Chesapeake Energy (CHK), Range Resources (RRC), Quicksilver Resources (KWK), and Southwestern Energy (SWN) or energy ETFs such as the Energy Select Sector SPDR Fund (XLE) watch temperatures during the winter heating season. This because a large part of natural gas demand during the winter comes from households or businesses that use it for home heating. Warmer weather translates into less natural gas demand and therefore lower prices and vice versa.

For the week ending February 9, heating degree days (as weighted by gas home-heating customers) for the US totaled 205 versus the normal figure for corresponding weeks past of 212. Heating degree days (HDD) are a measure of how much colder than room temperature the weather is, and the greater the HDD figure, the colder it is. This week’s HDD figure was lower than normal, meaning weather was warmer than normal which implies less natural gas demand and therefore lower natural gas prices.

2013.02.12 - HDD Nat GasEnlarge Graph

The above graph displays weekly heating degree day data for this winter compared to a normal winter. As one can see, this week’s figure lies below the normal trendline.

2013.02.12 - HDD Nat Gas CumuEnlarge Graph

The graph above displays cumulative heating degree days from the start of the heating season. One can see that not only was last week warmer, but the winter as a whole thus far has generally been warmer than normal.

Theoretically, lower demand translates into lower natural gas prices, which affects the earnings and valuations of natural gas weighted producers. The below graph displays natural gas prices over time versus the stock prices of CHK and KWK, two producers whose production is currently weighted towards natural gas.

2013.02.12 - Nat Gas vs CHK vs KWKEnlarge Graph

Over the past few years, the equity prices of these companies have trended with natural gas prices. Therefore, an investor with holdings in natural gas weighted producers (such as CHK, KWK, RRC, and SWN) may find it prudent to be aware of weather as an indicator of natural gas demand and therefore price. Additionally, some natural gas producers can be found in energy ETFs such as the Energy Select Sector SPDR (XLE), though investors should note that domestic natural gas producers comprise only a small portion of XLE in particular.

The Realist Discussions