Natural gas is still below $4.50 per MMBtu given spring’s start

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Why energy commodities like oil and gas traded lower on the week (Part 2 of 4)

(Continued from Part 1)

Natural gas prices traded slightly lower on the week

Natural gas prices closed at $4.44 per MMBtu for the week ended April 4, 2014, slightly lower than the $4.49 per MMBtu we saw the prior Friday. One of the major factors for the slight drop in natural gas prices during the week was a bearish report from the U.S. Energy Information Administration that showed that natural gas stocks declined less than anticipated, possibly signaling weaker-than-anticipated demand for the fuel. Natural gas prices have fallen from highs of over $6 per MMBtu earlier this year. Demand had spiked this winter due to colder-than-normal winter weather—though the onset of milder spring temperatures has caused demand and prices to fall back to below $4.50 per MMBtu.

Natural gas prices are especially important for domestic independent upstream names whose production largely includes natural gas, such as Chesapeake Energy (CHK), Southwestern Energy (SWN), Comstock Resources (CRK), and Quicksilver Resources (KWK). Natural gas price movements are also relevant for commodity ETFs such as the U.S. Natural Gas Fund (UNG), an exchange-traded fund designed to track the price of Henry Hub natural gas (the standard benchmark for domestic natural gas prices).

Natural gas prices are low from a long-term perspective

From a long-term historical perspective, natural gas has been trading at low levels over the past few years. Prior to the financial crisis of 2008, natural gas had reached peaks of over $15.00 per MMBtu. Since 2008, a considerable amount of natural gas supply has come online without an equivalent increase in demand due to the discovery and development of large natural gas shale resources in the U.S. Many investors expect natural gas prices to remain relatively depressed, as the development of shale resources has allowed companies to produce natural gas economically at lower prices.

This past week’s movements in natural gas prices were neutral as natural gas prices only fell slightly compared to the previous week. From a medium-term perspective, natural gas is still up significantly from where it was a few months ago (the mid-$3-per-MMBtu range). However, prices remain low from a long-term perspective.

For companies weighted toward natural gas assets and production (such as CHK, SWN, CRK, and KWK), and the United States Natural Gas Fund ETF (UNG), natural gas prices have an important effect on valuation.

Continue to Part 3

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