Weather a major catalyst
The weather is the major driver of natural gas prices and a way investors can get an idea of how prices will likely move in the short term. Natural gas prices in turn drive short-term movements in stock prices of natural gas producers such as Devon Energy (DVN), EOG Resources (EOG), Ultra Petroleum (UPL), and Southwest Energy (SWN).
Since many of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), these trends also affect the ETF. Let’s see how the weather impacted prices last week.
Natural gas price movement
Natural gas prices started the week on a grim note. They plummeted to a new two-year low by falling ~4% to settle at $2.882 MMBtu (million British thermal units). A mild December and record production have been limiting natural gas prices.
On Tuesday, temperatures in the Midwest and Northeast plunged below normal, which managed to push natural gas prices off a two-year low, gaining ~2% to settle at $2.938.
Prices retreated on Wednesday, however. NatGasWeather.com forecast that the US natural gas demand will be higher than normal through January 13. However, extended forecasts that showed above normal temperatures capped gains.
Forecasts by WSI, a division of the Weather Company, showed above normal temperatures across the contiguous United States except for Maine, the Northern Rockies, and the Southwest.
Current frigid temperatures have therefore been unable to revive the market. Most likely, this is because of a market perception of surplus inventories to survive the cold. It may also be due to a warmer weather forecast toward the end of the month.
Prices closed at $2.871 MMBtu on Wednesday, the lowest since September 2012.
Prices rallied by ~2% on Thursday following a bullish EIA (U.S. Energy Information Administration) inventory report closing at $2.927. Prices still remained below $3 despite the bullish report. Read part 2 of this series to find out more about the latest EIA report.
The next part of this series talks about the major drivers of natural gas prices this year.