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Must-know: Crucial months unfold for natural gas prices

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Dec. 4 2020, Updated 10:42 a.m. ET

Short-Term Energy Outlook 

In its Short-Term Energy Outlook (or STEO) report, the U.S. Energy Information Administration (or EIA) forecasted higher natural gas prices this winter. According to the EIA’s forecast, residential gas prices will be 6% higher than last winter’s prices.

Although prices might be higher, the EIA reports that household heating expenditure will be lower this winter—compared to last year.

This is a result of the National Oceanic and Atmospheric Administration’s (or NOAA) forecast of milder temperatures this year—compared to last year. The NOAA forecasts that the Midwest would be 16% warmer, the South would be 12% warmer, and the Northeast would be 11% warmer.

While stronger prices are positive for natural gas producers, a milder winter outlook may discourage consumption more. Consumption is already going to be affected by higher prices.

Higher prices—combined with milder weather—discourages households’ consumption. A decrease in household consumption is negative for natural gas producers.

Natural gas prices impact companies that produce gas—like EOG Resources (EOG), Devon Energy (DVN), Chesapeake Energy (CHK), and EQT Corp. (EQT). All of these companies are part of the Energy Select Sector SPDR ETF (XLE).

More EIA projections

The EIA’s Winter Fuels Outlook includes projections for 10% colder and 10% warmer scenarios.

If the winter is 10% colder, heating expenditures—for households heating with natural gas—are expected to be 6% higher than last year. Consumption will still be 3% less than last year.

Under a 10% warmer scenario, the EIA expects consumption to decline by 17% and heating expenditure to decline by 12%—compared to last year.

However, last winter is a reminder that weather can be unpredictable. Producers and investors will watch the weather reports closely.

However, even in the event of another cold winter, the EIA doesn’t expect stocks to fall below 1,000 billion cubic feet (or bcf) by the end of this heating season.

The EIA projects inventories to be at 3,532 bcf at the end of October. It expects inventories to be drawn down to 1,534 bcf by end of March 2015.

The coming winter months and the increased heating demand will also impact propane prices.

In the next part of the series, we’ll discuss changes in propane inventories last week.

Click here to learn more about natural gas prices last winter.

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