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Why names like Southwestern are poised to benefit this winter

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Dec. 4 2020, Updated 10:52 a.m. ET

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).

Heating degree days were higher than normal last week

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For the week ending February 1, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 252 versus the normal figure for corresponding weeks past of 219. 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 a general increase in natural gas prices.

Note that natural gas prices had rallied earlier to $5.56 per MMBtu on January 29, before coming back down on the market’s expectations of warmer weather. Markets often trade on weather forecasts, ahead of actual weather.

Cumulative heating degree days since the beginning of October have totaled 2,930, compared to average heating degrees to date of 2,851. During this period, natural gas prices experienced a strong rally, from ~$3.60 per MMBtu to current levels of around $5.00 per MMBtu.

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, 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.

To learn about trading natural gas futures, see the Market Realist series How to trade rising natural gas prices and falling oil prices, particularly the section titled Must-know recommendation: Key ways to play the natural gas rally.

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