Natural gas prices dip given inventories and the start of spring
Natural gas prices drop on the week
Natural gas prices closed at $4.31 per MMBtu for the week ended March 21, 2014, down from $4.43 per MMBtu the prior Friday. One of the major factors for the fall of natural gas prices during the week was a bearish report from the U.S. Energy Information Administration that showed that natural gas stocks declined less than anticipated, possibly signaling less-than-anticipated demand for the fuel. Plus, one of the major sources of demand for natural gas prices is cold winter weather. However, as the worst of winter comes to an end, that also puts downward pressure on natural gas prices.
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Natural gas prices are especially important for domestic independent upstream names whose production largely includes natural gas, such as Chesapeake Energy (CHK), Southwestern Energy (SWN), Comstock Resources (CRK), and Quicksilver Resources (KWK). Natural gas price movements are also relevant for commodity ETFs such as the U.S. Natural Gas Fund (UNG), an exchange-traded fund designed to track the price of Henry Hub natural gas (the standard benchmark for domestic natural gas prices).
Natural gas prices are low from a long-term perspective
From a long-term historical perspective, natural gas has been trading at low levels over the past few years. Prior to the financial crisis of 2008, natural gas had reached peaks of over $15.00 per MMBtu. Since 2008, a considerable 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 investors expect natural gas prices to remain relatively depressed, as the development of shale resources has allowed companies to produce natural gas economically at lower prices.
This past week’s movements in natural gas prices were slightly bearish. From a medium-term perspective, natural gas is still up significantly from where it was a few months ago (the mid-$3-per-MMBtu range). However, prices remain low from a long-term perspective.
For companies weighted toward natural gas assets and production (such as CHK, SWN, CRK and KWK), and the Natural Gas Fund ETF (UNG), natural gas prices have an important effect on valuation.