Demand for natural gas rises in the summer, when power plants generate more electricity to fuel cooling needs
Natural gas is a major fuel used in electricity generation and, therefore, demand increases in the summer when more electricity is used for air conditioning. Because of this, hotter than normal weather can increase natural gas usage and consequently natural gas prices. For example, during the summer of 2012, record hot temperatures were experienced in much of the U.S. Cooling degree days from the week ended May 5th through the week ended September 29th totaled 1,311 compared to an average of 1,079. During that period, natural gas prices rallied from ~$2.30/MMBtu to ~$3.30/MMBtu, partially due to the unusually hot summer. Natural gas price movements especially affect the earnings of major domestic natural gas producers, such as Chesapeake Energy (CHK), Range Resources (RRC), Quicksilver Resources (KWK), and Southwestern Energy (SWN). Additionally, many of these companies are part of the energy ETFs, such as the Vanguard Energy ETF (VDE).
Temperatures were milder than average last week
For the week ending August 10th, cooling degree days for the U.S. totaled 68 versus the normal figure of 72 for corresponding weeks past. Cooling degree days (CDD) are a measure of how much warmer than room temperature the weather is, and the greater the CDD figure, the hotter it is. This week’s CDD figure was lower than normal, meaning weather was milder than normal, which implies less natural gas demand and, therefore, lower natural gas prices. On August 9th, natural gas prices finished lower at $3.23/MMBtu compared to $3.35/MMBtu on July 26th.
Theoretically, lower demand translates into lower natural gas prices, which affects the earnings and valuations of natural gas weighted producers. The below graph displays natural gas prices over time versus the stock prices of CHK and KWK, two producers whose production is currently weighted towards natural gas. Over the past few years, the equity prices of these companies have trended with natural gas prices.
Investors with holdings in natural gas weighted producers (such as CHK, KWK, RRC, and SWN) or a natural gas ETF, such as UNG, may find it prudent to be aware of weather as an indicator of natural gas demand and, therefore, price. This past week’s milder than normal weather was a negative short-term catalyst for natural gas and also natural gas producers, and prices traded lower.
(Read more: An Introduction to Oil and Gas Hedges: Collars)
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