Bearish Inventory Pulls Down Natural Gas Prices despite Weather



Natural gas prices

Natural gas prices fell by 1.42% between Friday, August 21, and Thursday, August 27. Prices closed at $2.638 per MMBtu (British thermal units in millions) on August 27. On August 21, prices had closed at $2.676 per MMBtu.

Lower natural gas prices are negative for natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), QEP Resources (QEP), and Cabot Oil & Gas (COG). These companies make less money when natural gas prices fall. All of these companies combined make up ~2% of the Vanguard Energy ETF (VDE).

With lower prices, natural gas producers may be inclined to produce less. This would, in turn, be negative for the energy MLP sector, which includes companies such as MarkWest Energy Partners (MWE). Lower production would mean lower volumes to transport, which could reduce MLP revenues.

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Price movements

Natural gas prices on Monday, August 24, fell ~1% from the previous Friday’s closing price of $2.676 per MMBtu. They settled at $2.65 per MMBtu. Prices fell on speculation that the soon approaching fall will see cooler temperatures and lower the demand for natural gas for electricity generation purpose.

However, prices turned around on Tuesday as a result of weather forecasts. MDA Weather Services forecasted above-normal temperatures in major parts of the Northeast and Midwest regions in the coming week. Prices increased by 1.3% to settle at $2.685 per MMBtu.

Prices continued to inch higher on Wednesday as a result of hotter weather forecasts. Prices increased 0.29% and settled at $2.693 per MMBtu.

On Thursday, prices took a significant dip, canceling the gains they had seen earlier in the week. They fell 2.04% to close at $2.638 per MMBtu. The decrease was due to the bearish EIA (U.S. Energy Information Administration) report, which showed a larger-than-expected storage increase.

Natural gas prices seemed to have recovered the next day, as they were trading near ~$2.74 per MMBtu early on Friday.

The following part of this series analyzes how various securities that are exposed to natural gas performed last week.


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