Why natural gas prices hit $4 before returning to previous levels

Natural gas prices keep rising despite weekly hits from inventories (Part 3 of 6)

(Continued from Part 2)

Natural gas price movement

Natural gas prices touched $4 last week due to forecasts of colder-than-normal weather in October. On Monday, prices increased to $4.15 per MMBtu (British thermal units in millions), after forecasts from MDA Weather Services called for below normal temperatures in parts of the central U.S. from October 4 through October 13.

Colder weather is bullish for natural gas prices because heating demands increase. Plus, natural gas inventory levels in the preceding week, ending September 19, were 13% below the five-year average, which is the biggest deficit since 2005. On Monday, cold weather coupled with weak inventory levels caused prices to close ~4% higher than at the close of the previous market day.

However, prices fell on Tuesday, September 30, due to milder weather forecasts in Eastern and Central USA. The Global Forecast System showed normal temperatures in these regions from October 6 through October 15. Previous forecasts had showed cooler temperatures in these regions.

Plus, speculations that the inventory figure will increase by triple digits, 105 Bcf to 108 Bcf, also caused prices to slip. Part 2 of this series covered actual inventory movement last week.

Prices closed at $4.12, capping the first quarterly drop at ~1% lower than the previous market close.

The declining trend continued Wednesday, closing at $4.

Falling again from levels close to $4, natural gas prices retreated to $3.93 MMBtu on Thursday after the EIA reported a higher than expected increase in inventories.

Background

Gas inventories increased to 3.1 trillion cubic feet (or Tcf) on September 26 from lows of 1.887 Tcf in March this year. Inventory gains have now consistently been topping the five-year weekly averages for 24 straight weeks.

The booming supply from the shale gas revolution has been driving this remarkable build in U.S. natural gas stocks. Check out the next part of this series to find out more about the booming U.S. natural gas production.

Key stocks and ETFs

Natural gas prices affect the margins of producers like Chesapeake Energy (CHK), Devon Energy (DVN), EOG Resources (EOG), and Cabot Oil and Gas (COG). Most of these companies are components of the Energy Select Sector SPDR ETF (XLE).

Apart from natural gas prices, Market Realist also covers crude prices. Check out Market Realist’s Energy & Power page to read about last week’s crude inventory movements.

Continue to Part 4

Browse this series on Market Realist:

• Part 1 - Why natural gas inventory figures are key for energy investors

• Part 2 - Natural gas inventory figures crush analysts’ expectations

• Part 4 - Why winter could counterbalance surging natural gas production