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Why natural gas prices climbed ahead of colder weather

Ingrid Pan, CFA

Natural gas prices closed up on the week

Natural gas spot prices closed at $3.78 per MMBtu (millions of British thermal units) on October 11—up from $3.51 per MMBtu the prior week. Prices rose as inventories rose less than expected (see Natural gas inventories rose less than expected, a bullish sign), and incoming colder weather is anticipated to boost natural gas demand.

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 US 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 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.

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. The chart below shows natural gas prices plotted against CHK’s and KWK’s stock prices over time on a percentage change basis. It appears that the companies’ valuation has tracked the price of natural gas quite closely.

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

This past week, natural gas prices were up, which was a positive 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 US Natural Gas Fund ETF (UNG). Investors with such holdings find it prudent to track the price of natural gas.

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