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Natural Gas Prices Rose Last Week then Leveled off—Why?

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Aug. 10 2015, Published 2:53 p.m. ET

Natural gas prices

Natural gas prices rose by 3.57% between Friday, July 31, and Thursday, August 6. Prices closed at $2.813 per MMBtu (British thermal units in millions) on August 6. On July 31, prices closed at $2.716 per MMBtu.

Higher natural gas prices are positive for natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), QEP Resources (QEP), and Cabot Oil & Gas (COG). These companies make more money when natural gas prices rise. And all of these companies combined make up ~1.6% of the iShares U.S. Energy ETF (IYE).

With higher prices, natural gas producers may be motivated to produce more. This would, in turn, be positive for the energy MLP sector, which includes companies such as MarkWest Energy Partners (MWE). Higher production would mean higher volumes to transport, which could boost MLP revenues.

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Price movements

Natural gas prices on Monday, August 3, rose 1.17% from the previous Friday’s closing price of $2.716 per MMBtu. They settled at $2.748 per MMBtu. Prices rose on warmer weather forecasts. Warmer weather boosts power demand for cooling purposes. Approximately 30% of American power generation is fueled by natural gas.

Prices continued to advance on Tuesday after forecasts showed that next week, above-normal temperatures would prevail in Texas—one of largest markets in terms of cooling demand. Prices rose 2.32% to settle at $2.812 per MMBtu on Tuesday.

On Wednesday, however, prices fell, as weather forecasts turned cooler. Prices fell ~0.5% and settled at $2.798 per MMBtu.

On Thursday, prices rose again by ~0.54% and closed at $2.813 per MMBtu thanks to a bullish inventory report released by the EIA (U.S. Energy Information Administration). The EIA report shows a smaller-than-expected storage build. Yet the daily increase was less pronounced than the gains prices saw earlier on in the week. The explanation for this could be that the report shows that natural gas storage levels remain higher than the five-year average. Inventories have been outpacing the five-year average since the week ended May 29.

A decline in natural gas consumption also partially offset the positive impact on prices. We’ll discuss the latest consumption trends later in this series.

Natural gas prices remained subdued the next day, trading near ~$2.808 per MMBtu early on Friday.

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

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