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Natural gas prices are especially affected during the winter as many households use natural gas for home heating. Warmer weather translates into less natural gas demand and therefore lower prices. Conversely, colder weather translates into more natural gas demand and higher prices. Natural gas prices affect the earnings of major domestic natural gas producers such as Chesapeake Energy (CHK), Range Resources (RRC), Quicksilver Resources (KWK), and Southwestern Energy (SWN). Additionally, many of these companies are part of the energy ETFs such as the Energy Select Sector SPDR Fund (XLE).
For the week ending February 23, heating degree days (as weighted by gas home-heating customers) for the US totaled 217 versus the normal figure for corresponding weeks past of 190. 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 higher than normal, meaning weather was colder than normal which implies more natural gas demand and therefore higher natural gas prices. Natural gas prices did rise on the week from $3.15/MMBtu (millions of British thermal units) on 2/15 to $3.29/MMBtu on 2/22 and traded over $3.40/MMBtu on 2/25, partially on expectations of colder weather.
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 above the normal trendline. This is the first week since the week ended January 26 that the weather was colder than normal.
The graph above displays cumulative heating degree days from the start of the heating season. Despite last week’s colder than normal weather, the winter as a whole thus far has generally been warmer than normal which has muted natural gas demand throughout the season.
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.
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 week-to-week weather as a short-term 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.
© 2013 Market Realist, Inc.