Natural gas prices are affected by winter weather
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). Plus, many of these companies are part of energy ETFs, such as the Vanguard Energy ETF (VDE).
Heating degree days were lower than normal last week
For the week ending November 2, heating degree days (as weighted by gas home-heating customers) for the U.S. totaled 90 versus the normal figure for corresponding weeks past of 100. 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 lower than normal, meaning weather was milder than normal. This implies less natural gas demand and, therefore, lower natural gas prices.
Natural gas prices sank last week, closing Friday, November 1, at $3.51 per MMBtu, as compared to $3.71 per MMBtu a week earlier. The natural gas market was weak, as weather services forecast continued mild weather to come.
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 be aware of weather as an indicator of natural gas demand and, therefore, price.
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