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Natural gas spot prices closed at $4.22/MMBtu (millions of British thermal units) on 4/12/13, up $0.08 from the prior week, the eighth week in a row that gas prices have rallied. Higher natural gas prices are a positive catalyst for energy stocks, especially domestic independent upstream names with a large proportion of production comprised of natural gas, such as Chesapeake Energy (CHK), Southwestern Energy (SWN), Comstock Resources (CRK), and Quicksilver Resources (KWK). Higher natural gas price movement is also positive for the US Natural Gas Fund (UNG), an ETF designed to track the price of Henry Hub natural gas (the standard benchmark for domestic natural gas prices). Last week’s higher prices were largely driven by a larger than normal draw on natural gas inventories. For more on this, please see “Another bullish inventory figure for natural gas sends prices up on the day“.
For much of the winter heating season, natural gas prices had been largely range-bound between $3.15/MMBtu and $3.50/MMBtu with much of the fluctuation due to changing winter weather expectations. However, since mid-February when prices bottomed out at $3.15/MMBtu, natural gas has experienced a strong rally and now trades in the ~$4.25/MMBtu range. The rally was due mostly to sustained colder than normal winter weather and larger than normal inventory draws.
Despite the strong rally over the past two months, natural gas is still low from a long-term historical perspective. Prior to the financial crisis of 2008, natural gas had reached peaks of over $15.00/MMBtu. 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 U.S. Many expect natural gas prices to remain relatively depressed as the development of shale resources has allowed natural gas to be produced economically at lower prices.
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 natural gas prices, following seven other weeks of positive price movement. The strong eight week-long rally is a positive medium-term catalyst. This most positively affects natural gas weighted producers, such as the ones mentioned above (CHK, SWN, CRK, and KWK) and the US Natural Gas Fund ETF (UNG); investors with such holdings find it prudent to track the price of natural gas.
© 2013 Market Realist, Inc.