On March 13, 2017, natural gas futures (UNG) (BOIL) (FCG) contracts for April 2017 delivery closed at $3.04 per MMBtu (million British thermal units), which is ~1.2% above the previous closing price. Natural gas prices rose as traders turned bullish after weather forecasts indicated lower temperatures. However, the rise in oil rigs could have a negative impact on natural gas prices.
Natural gas April futures rose 4.8% on a closing price basis in the week ending on March 13, 2017. In the trailing week, the Energy Select Sector SPDR ETF (XLE) fell 3%, while the S&P 500 Index (SPY) (IVV) (VNN) (SPX-INDEX) was flat. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) fell 0.3% during this period
On March 13, 2017, active natural gas futures traded at a discount of $0.33 to the futures contracts 12 months ahead—the lowest level since January 30, 2017. The fall in the spread could point to bullish sentiment for natural gas prices in the futures market.
What’s the correlation?
In this part of the series, we’ll look at the correlations of natural gas–heavy stocks with natural gas. These companies operate with production mixes of at least 60.0% in natural gas (UNG) (BOIL) (GASL) (FCG). They’re all part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
The following natural gas–heavy upstream companies had the highest correlations with natural gas futures from February 13, 2017, to March 13, 2017:
- Range Resources (RRC) – 43%
- Rice Energy (RICE) – 22.6%
- Southwestern Energy (SWN) – 21.9%
- Cabot Oil & Gas (COG) – 21.3%
- Antero Resources (AR) – 20.6%
The following natural gas–weighted stocks were correlated the least with natural gas futures during the same period:
Natural gas–weighted stocks with high correlations to natural gas futures moved with natural gas. On the other hand, stocks with low or negative correlations weren’t impacted as much by natural gas price movements.
If you’re bullish on natural gas, particularly after the recent rebound in natural gas prices, you could consider realigning your portfolio to include stocks with a higher correlation in order to gain from any rise in the commodity.
In the final part of this series, we’ll see how natural gas–weighted stocks performed compared to natural gas.