Weather: A major determinant of gas prices
The weather is the major driver of natural gas prices. As a result, the weather forecast can give investors a pretty good idea of how prices are likely to move in the short term. These prices drive the short-term stock price movements of natural gas producers such as Southwest Energy (SWN), Range Resources (RRC), Ultra Petroleum (UPL), and Devon Energy (DVN).
And, since many of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), this energy ETF is affected by the weather as well.
Natural gas price movement
The week began with prices falling to fresh new lows on moderate weather forecasts. Commodity Weather Group forecast above-normal temperatures from the Great Plains all the way across Florida for the next five days.
Prices fell ~9.5% on Tuesday, January 20, to settle at $2.831 MMBtu (million British thermal units).
Prices rebounded on Wednesday after forecasts turned colder. WSI Corporation forecast below-normal temperatures in some parts of the eastern US from January 31 through February 4. Prices increased 5% to settle at $2.974 on Wednesday.
Prices again dipped on Thursday after the U.S. Energy Information Administration, or EIA, reported a less-than-expected decrease in natural gas inventories. Read Part 2 of this series for more on last week’s inventory movement.
Replicating a see-saw motion, prices increased on Friday on colder weather forecasts, as you can see in the graph above. Commodity Weather Group forecast below-normal temperatures in the Northeast for the next five days. This will be followed by colder weather that’s expected to extend into the Midwest and Southern portions of the US from January 28 until February 6.
Prices increased ~5.3% to settle at $2.986 MMBtu on Friday.
Apart from the weather, there’s one more factor that affects natural gas prices. We’ll look at that factor, next.