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Natural gas gained last week despite warmer than normal temps

Natural gas gained last week despite warmer than normal temps

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  • Last week’s weather was warmer than normal, which was a negative  short-term catalyst for natural gas prices and natural gas producers as natural gas is a major fuel source for home heating. However, natural gas prices continued to climb on a larger than expected inventory draw and future expectations of cold weather.
  • Despite colder than normal weather for the three weeks prior to last week, the winter as a whole has been warmer than normal.

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 like the Vanguard Energy ETF (VDE).

For the week ending March 15, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 142 versus the normal figure for corresponding weeks past of 152. 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. Despite this, natural gas prices continued a four-week long rally and prices rose from $3.63/MMBtu (millions of British thermal units) on 3/8 to $3.87/MMBtu on 3/15. Natural gas prices rose largely due to a greater than expected depletion of natural gas inventories (for further information on this please read “Another large inventory draw boosts natural gas prices to highest point since Nov 2012”), and the expectation of colder weather in the following few days.

The top 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.

Natural gas gained last week despite warmer than normal temps

The graph above displays cumulative heating degree days from the start of the heating season. This week was warmer than normal, however, the prior three weeks were colder than normal. Despite the three weeks of colder than normal weather experienced recently, the winter as a whole thus far has generally been warmer than normal which muted natural gas earlier in 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.

Natural gas gained last week despite warmer than normal temps

Investors with holdings in natural gas weighted producers (such as CHK, KWK, RRC, and SWN) or a natural gas ETF such as UNG may find it prudent to be aware of weather as an indicator of natural gas demand and therefore price. As stated, this week’s warmer than normal temperatures were a negative short-term catalyst for nat gas (though nat gas prices advanced on the week), and from a longer term perspective, the winter as a whole has been warmer than normal which had dampened prices earlier in the heating season.

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