Weather a major catalyst
The weather is the major driver of natural gas prices, allowing investors to 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 such as Devon Energy (DVN), Range Resources (RRC), Ultra Petroleum (UPL), and Chesapeake Energy (CHK).
Since many of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), these trends affect the ETF as well. Let’s see how weather impacted prices the last week of 2014.
Natural gas price movement
Prices started the week on a cheery note by rising almost 6% on Monday, December 29, upon colder weather forecasts in January for the Midwest, according to Commodity Weather Group LLC.
The government’s midday Global Forecast System also forecast lower temperatures in Texas and the Northeast from January 3 through January 7.
Prices climbed to $3.189 per MMBtu (million British thermal units) on Monday.
Prices fell back on Tuesday on updated weather forecasts by Commodity Weather Group LLC, which forecast slightly warmer temperatures in the South, West, and Pacific Northwest.
Prices skidded by 3.3% to $3.094, paring Monday’s gains.
On Wednesday, prices continued their downward march as forecasts from Commodity Weather Group LLC indicated that January 2015, in the peak demand season, would still be 6.7% warmer than January 2014. A bearish inventory report also contributed to the drop. Read part 2 of this series to know more about last week’s inventory movements.
Natural gas prices capped the year with a first annual drop since 2011, falling 6.6% compared to the previous market close and closing at $2.889. This is the lowest in almost two years. It’s a result of record production and unsupportive weather. Prices fell 32% in 2014.
Prices finished off the week and started the year with a slight rally. Prices rose from a two-year low on colder weather forecasts in the Midwest, South, and East, according to Commodity Weather Group.
Prices rose 3.9% to close at $3.003 on Friday.
The following part talks about the major divers of natural gas prices this year.