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Will Natural Gas Take Merchant Stocks for a Ride Again This Year?

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Merchant stocks and their correlation with natural gas

US power generation is dominated by natural gas since gas-fired generation has become more economical in the last few years. Consequently, merchant power companies have a significant exposure to natural gas prices (UNG) due to market-driven wholesale power prices.

Considering the prices for the last year, merchant stocks NRG Energy (NRG), Dynegy (DYN), and Calpine (CPN) have correlation coefficients near 0.20 with natural gas.

NRG ng

All this means that a 1.0% change in natural gas prices could result in roughly a 0.20% change in these merchant power stocks.

By comparison, regulated utilities (SO) (DUK) are remotely exposed to natural gas prices since they have less exposure to market-driven power prices.

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