Weather drives natural gas prices
The weather is the major driver of natural gas prices, so investors generally have an idea about how prices are likely to move in the short term. These prices in turn drive short-term movements in the stock prices of natural gas producers including Devon Energy (DVN), QEP Resources (QEP), Range Resources (RRC), and Ultra Petroleum (UPL).
As well, since those companies that are components of the Energy Select Sector SPDR ETF (XLE) make up ~3% of the ETF, these trends also affect XLE.
Natural gas price movement
Prices declined by 2.4 % over the previous market close on Monday, 23 February, amid oversupply concerns, despite expectations of weather-driven demand. The markets shrugged off cold-weather forecasts, instead focusing on the possibility of production flattening. Prices settled at $2.879 per MMBtu (million British thermal units) on Monday.
Prices advanced on Tuesday, however, as forecasts from MDA Weather Services called for frigid temperatures across most of the Lower 48 through March 10. They increased ~0.8% to $2.902 per MMBtu.
Prices fell again on Wednesday, even as markets speculated about the findings of the EIA’s (U.S. Energy Information Administration) weekly natural gas inventory report. Prices fell 0.3% to $2.894 per MMBtu.
This was followed by another slip on Thursday, after the EIA released a bearish inventory report, as we saw in Part 2 of this series. Although the decline itself was bullish, it was lower than market expectations, indicating that production will continue to overwhelm even major withdrawal numbers. Prices fell ~7%, to $2.697 per MMBtu.
Nevertheless, clocking the first monthly gain since November, prices rebounded on Friday after MDA Weather Services forecast colder-than-average temperatures in the eastern US through March 13. Prices climbed ~1.4% to settle at $2.734 per MMBtu.
Aside from the weather, there’s another factor that affects natural gas prices. Continue to the next part of the series to find out what that is.