Natural gas prices had been sliding since mid-January with traders concerned about warmer than normal weather and higher than expected inventory builds. Prices jumped over the past week given forecasts of colder weather to come, which is a short-term positive catalyst. The below chart shows natural gas prices over the past twelve months.
From a medium-term perspective, natural gas has rallied from its bottom in 2Q12. The commodity dropped to historic lows during that period mostly due to excess supply and inventory buildup in addition to a winter that was significantly warmer than average. A hotter than normal summer and coal-to-gas switching helped to create more demand for natural gas since 2Q12, giving support to prices.
Though natural gas had rallied somewhat from its bottom in 2Q12, in the context of a longer time frame (see chart below), natural gas is still near historic lows. Over the past several years, a large amount of natural gas supply has come online without an equivalent increase in demand due to the discovery and development of large natural gas shale resources in the US. Many expect natural gas prices to remain relatively depressed as the development of the shale resources has allowed natural gas to be produced economically at lower prices. Additionally, many do not expect natural gas supply to be significantly reduced anytime soon. Please see “Natural gas production not likely to curb soon, bearish for dry gas companies” for more on this.
Market participants and upstream energy companies monitor natural gas prices as lower prices translate into lower revenues, and therefore lower margins and valuation for natural gas producers. The below chart shows natural gas prices plotted against CHK’s and KWK’s stock price over time on a percentage change basis, and it appears that the companies’ valuation has tracked the price of natural gas quite closely.
Last week saw a move up in prices, which is a positive short-term catalyst. This most strongly affects natural gas weighted producers such as the ones mentioned above (CHK, SWN, XCO, and KWK) and the US Natural Gas Fund ETF (UNG) and investors with such holdings find it prudent to track the price of natural gas.
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