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Why this colder-than-average winter has helped natural gas prices

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Weather and 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).

2014.01.14 - Weather HDD Nat Gas

Heating degree days were higher than normal last week

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For the week ending January 11, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 247 versus the normal figure for corresponding weeks past of 226. 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 higher than normal, meaning weather was colder than normal. This implies more natural gas demand and therefore increases natural gas prices.

However, despite colder-than-normal weather during the week, natural gas prices decreased, as the EIA reported neutral natural gas inventories data and the market is expecting warmer-than-normal weather in mid-January 2014. Natural gas prices closed at $4.05 per MMBtu compared to $4.30 per MMBtu the prior week.

Cumulative heating degree days since the beginning of October have totaled 2,247 in comparison to average heating degrees to date of 2,182. During this period, natural gas prices have experienced a strong rally, from ~$3.60 per MMBtu, reaching $4.45 per MMBtu before retreating to current levels, around $4.05 per MMBtu.

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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.

2014.01.13-Natural Gas vs. CHK vs. KWK

Investors with holdings in natural gas–weighted producers (such as CHK, RRC, KWK, and SWN), an ETF containing producers of natural gas such as the SPDR Oil & Gas Exploration and Production ETF (XOP), or a natural gas ETF such as 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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