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Natural gas prices supported by unseasonably cold weather last week

2013.03.11 - Nat Gas WeatherEnlarge Graph

  • Last week’s weather was colder than normal, which was a positive short-term catalyst for natural gas prices and natural gas producers as natural gas is a major fuel source for home heating.
  • Despite recent colder weather, 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 such as the Vanguard Energy ETF (VDE).

For the week ending March 8, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 182 versus the normal figure for corresponding weeks past of 165. 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 rose on the week from $3.46/MMBtu (millions of British thermal units) on 3/1 to $3.63/MMBtu on 3/8.

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 above the normal trendline. This is the second week in a row that the weather was colder than normal.

2013.03.11 - Nat Gas Weather CumEnlarge Graph

The graph above displays cumulative heating degree days from the start of the heating season. Despite the prior two weeks’ 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.

2013.03.11 - Nat Gas vs CHK vs KWKEnlarge Graph

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 colder than normal temperatures were a positive short-term catalyst for natural gas, though from a longer term perspective the winter as a whole has been warmer than normal which dampened prices earlier in the heating season.