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Must-know: Why cold weather is a major plus for natural gas names

Ingrid Pan, CFA

Winter weather affects natural gas prices

Natural gas prices are especially affected during the winter, as many households use natural gas for home heating. Warmer weather translates into less natural gas demand and therefore lower prices. Conversely, colder weather translates into more natural gas demand and higher prices. Natural gas prices affect the earnings of major domestic natural gas producers, such as Chesapeake Energy (CHK), Range Resources (RRC), Quicksilver Resources (KWK), and Southwestern Energy (SWN). Many of these companies are part of energy ETFs, such as the Vanguard Energy ETF (VDE).

Heating degree days were higher than normal last week

For the week ending November 9, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 118 versus the normal figure for corresponding weeks past of 115. Heating degree days (or HDD) measure how much colder than room temperature the weather is, and the greater the HDD figure, the colder it is. This week’s HDD figure was slightly higher than normal, meaning weather was slightly colder than normal. This implies more natural gas demand and therefore higher natural gas prices.

Natural gas prices sank last week, closing Friday, November 8, at $3.56 per MMBtu (million British thermal units), compared to $3.51 per MMBtu a week earlier. The natural gas market has strengthened in recent days to trade above $3.60 per MMBtu on a colder weather outlook.

Theoretically, higher demand translates into higher 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 monitor weather as an indicator of natural gas demand and therefore price. 

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