Winter expectations drive natural gas prices

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Natural gas price movement

Natural gas prices started the week on a strong note following cold weather forecasts in the days to come. The preceding week had seen prices drop ~5.5% as traders profited after prices rose to the highest since the end of June this year. Prices on November 10 reached more than 25% higher than their end October trough.

P3 - 30Day NG

The rest of the week saw an acceleration of that trend as prices for the more active January contract on the NYMEX moved from levels near $4.25 per MMBtu (million British thermal units) at the start of the week, to ~$4.6 per MMBtu before the release of the weekly inventory data on Thursday.

This was driven by forecasts of cold weather persisting through to the end of November, as opposed to expectations of the weather warming up again towards the end of November earlier.

On Thursday, a combination of bullish inventory data, which saw inventories fall more sharply than analysts expected, and renewed forecasts for severely cold weather to persist beyond the current cold snap saw prices extend gains to near $4.7 per MMBtu.

The January natural gas contract closed the day at ~$4.6 per MMBtu. As of early Friday, it was trading mildly lower, near the $4.55 per MMBtu level.

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Key stocks and ETFs

Since the weather is the major driver of prices, investors can get an idea of how prices will likely move in the short term. These prices in turn drive short-term movements in stock prices of natural gas producers like Encana Corp. (ECA), QEP Resources (QEP), Ultra Petroleum (UPL), and WPX Energy (WPX).

Plus, since many of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), these trends also affect the ETF as well.

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