Must-know: Why wintry weather helps boost natural gas prices

Ingrid Pan - Author

Aug. 18 2020, Updated 5:27 a.m. ET

Winter weather affects natural gas prices

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), Quicksilver Resources (KWK), Range Resources (RRC), and Southwestern Energy (SWN). Also, many of these companies are part of energy ETFs, such as the SPDR Oil & Gas Exploration and Production ETF (XOP).

Heating degree days were near normal last week, but winter storm forecasts and inventory figures pushed up prices

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For the week ending December 7, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 178 versus the normal figure for corresponding weeks past of 179. Heating degree days (or HDD) measure 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 very slightly lower than normal, meaning weather was a bit milder than normal. This implies less natural gas demand and therefore lower natural gas prices.

However, natural gas prices had risen on the week in anticipation of incoming winter storms. Natural gas prices tend to trade on weather forecasts—ahead of actual weather. Also, a bullish natural gas inventory report helped boost prices. For more on that trend, please see Why natural gas prices jumped on the latest inventory report. Gas prices ended at $4.11 per MMBtu on December 6, compared to $3.95 per MMBtu the week prior.

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Theoretically, higher demand translates into higher natural gas prices, which affects the earnings and valuations of natural gas–weighted producers (and vice versa, in that lower demand means lower prices). 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.

Investors with holdings in natural gas–weighted producers (such as CHK, KWK, and SWN), an ETF containing natural gas producers like the SPDR Oil & Gas Exploration and Production ETF (XOP), or a natural gas ETF like the United States Natural Gas Fund (UNG) may find it prudent to monitor weather as an indicator of natural gas demand and therefore prices.


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