Why Libya narrows the West Texas Intermediate-Brent oil spread

Part 4
Why Libya narrows the West Texas Intermediate-Brent oil spread (Part 4 of 5)

Why mild summer weather weighs down natural gas prices

Mild summer weather lowers natural gas prices

Natural gas prices closed at $4.41 per million British thermal units (or MMBtu) for the week ended July 3, 2014—unmoved from the prior week. Prices remained unchanged as the analysts’ expectations of a rise in inventory were in line with the actual rise in inventory level. In the summer months, mild weather means less energy is needed for cooling devices such as air conditioners. As a result, less natural gas is needed as fuel for power plants.

Natural gas prices have fallen from highs of over $6 per MMBtu earlier this year. Demand had spiked this winter due to colder-than-normal winter weather, but the onset of milder spring temperatures has caused demand and prices to currently fall back to around $4.40 per MMBtu. Natural gas prices remain significantly up from 2013, when natural gas averaged ~$3.70 per MMBtu.

Nat Gas price Jun 13 to Jun-14Enlarge Graph

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 sales are the major source of revenue for these kinds of companies. Natural gas price movements are also relevant for commodity exchange-traded funds (or ETFs) such as the U.S. Natural Gas Fund (UNG)—an exchange-traded fund designed to track the price of Henry Hub natural gas, which is the standard benchmark for domestic natural gas prices.

Nat Gas price Jan-06 to Jan-14Enlarge Graph

This past week’s movements in natural gas prices were neutral for natural gas companies. From a medium-term perspective, natural gas is still up significantly from where it was in the latter half of 2013—the mid-$3-per-MMBtu range. However, prices remain low from a long-term perspective, as the previous graph shows.

Continue reading the next section in this series to learn about how natural gas liquids (or NGLs) prices can affect certain energy companies.

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