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Natural gas slides third consecutive week, closes back under $4.00/MMBtu

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  • Natural gas prices closed the week on May 10th at $3.91/MMBtu, compared to the prior week’s close of $4.04/MMBtu. This is the third week in a row that natural gas prices have declined, and prices are off 11% since hitting $4.41/MMBtu on April 19th.
  • News sources reported that natural gas declined on speculation that warmer weather would dampen demand for the commodity, as much if it is used for home heating.

Natural gas spot prices closed at $3.91/MMBtu (millions of British thermal units) on 5/10/13, down $0.13 from the prior week, the third decline in a row following a strong nine week rally. Lower natural gas prices are a negative 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). Lower natural gas price movement is also negative for the U.S. Natural Gas Fund (UNG), an ETF designed to track the price of Henry Hub natural gas (the standard benchmark for domestic natural gas prices). News sources reported that lower prices were largely driven by reports of expected warmer weather, which dampens demand for the commodity as much of it is used for home heating.

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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 had experienced a strong rally and traded at points up to the ~$4.40/MMBtu range until the past three weeks when prices declined. The rally was due mostly to sustained colder than normal winter weather and larger than normal inventory draws.

Overall, natural gas is still priced 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.

2013.05.12 - Nat Gas Prices

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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.

2013.05.12 - Nat Gas vs CHK vs KWK

The past three weeks saw a move down in natural gas prices, which resulted in a negative short-term catalyst. Prior to that, natural gas had a strong two month long rally, which was a positive medium-term catalyst. Though natural gas prices appear high within the context of the past year or two, from a wider long-term perspective (5+ years), natural gas prices are relatively low. Fluctuations in natural gas prices most affect nat gas weighted producers, such as the ones mentioned above (CHK, SWN, CRK, and KWK) and the U.S. Natural Gas Fund ETF (UNG); investors with such holdings find it prudent to track the price of natural gas.

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