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Natural gas prices flat, but cold weather could help boost demand

Ingrid Pan, CFA

Natural gas prices closed slightly down on the week

Natural gas spot prices closed at $3.51 per MMBtu (millions of British thermal units) on October 4—down slightly from $3.56 per MMBtu the prior week.

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 movement is 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).

Looking ahead, weather will be an important demand factor

As the winter months approach, an important driver for natural gas demand and therefore natural gas prices will be temperatures. Colder weather will increase demand for natural gas, as it’s a major fuel for home heating. For more background, see Why winter temperatures will affect 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 large 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 United States. 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.

(Read more: Crack Spread 101 (Part 1: What’s a crack spread?))

For companies weighted towards natural gas assets and production, prices have an important effect on valuation

Market participants and upstream energy companies monitor natural gas prices because lower prices translate into lower revenues—and therefore lower margins and valuation for natural gas producers.

(Read more: Chesapeake Energy and its former CEO suggest huge Utica potential)

Slightly negative short-term catalyst: Prices remain relatively low from a long-term view

This past week, natural gas prices were down slightly, which was a negative short-term catalyst. In the medium term, winter weather will be an important driver to watch for natural gas prices. From a wider long-term perspective (five years and longer), natural gas prices are relatively low. Fluctuations in natural gas prices most affect natural gas–weighted producers, such as the companies mentioned above (CHK, SWN, CRK, and KWK), and the U.S. Natural Gas Fund ETF (UNG). Investors with such holdings find it prudent to track the price of natural gas.

(Read more: Introduction [PART 1])

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