Why cold weather warms natural gas investors

Natural gas production trends

The U.S. Energy Information Administration’s, or EIA, short-term energy outlook, released on October 7, projects a 5.4% year-over-year increase in total marketed natural gas production. This would bring production to around 73.98 billion cubic feet per day (or Bcf/d) in 2014. This is the biggest volume and percentage gain since 2011. And total marketed natural gas production is projected to grow another 2% in 2015.

Strong production trends

The boom in shale gas production is being led by the Marcellus and Eagle Ford regions. Aside from these, the Bakken, the Permian, and the greater Anadarko regions are also enjoying strong production growth.

So, a mild summer and increasing production has caused natural gas inventories to surge. The EIA raised its supply inventory forecast to 3,532 Bcf by the end of October, from its last month’s outlook of 3,477 Bcf.

Growing domestic production will put downward pressure on imports and in fact, might spur exports to Mexico.

Winter crucial for natural gas prices

The approaching winter could bring balance because a cold winter raises natural gas demand. Meanwhile, if production levels are high enough to meet the heating demand, prices may not be as pressured.

Strong prices are positive for the margins of gas-producing companies including Range Resources Corp. (RRC), Cabot Oil & Gas Corporation  (COG), Devon Energy Corp (DVN) and Southwest Energy Company (SWN). Most of these companies are part of the Energy Select Sector SPDR ETF (XLE).

Investor’s take

Last week, natural gas prices didn’t increase despite forecasts for cooler weather. The forecasts called for weather that would be cooler, but not cold enough to cause freezing temperatures. It would be typical of glass-half-empty investor pessimism to say that the failure of freezing temperatures to materialize took away the gains prices could have seen.

Read Part 3 for an analysis of natural gas prices last week.

Investors will continue to keep close watch on natural gas production and weather forecasts in the coming months.

In the next part of the series, we’ll discuss the outlook for natural gas prices.