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Why natural gas prices are up over 10% since early August

Ingrid Pan, CFA

Natural gas prices closed up on the week

Natural gas spot prices closed at $3.68 per MMBtu (millions of British thermal units) on September 13—up from $3.53 per MMBtu the prior week. A better-than-expected inventory report helped the commodity (see Why a positive inventory report helped natural gas prices), as did hotter weather (see Why another week of warm weather helped natural gas prices).

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part II))

Plus, natural gas prices are up over 10% since early August, likely helped by weather that’s been persistently hotter than average. This is a positive medium-term catalyst.

Higher natural gas prices are a positive catalyst for energy stocks—especially 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).

Higher natural gas price movement is also positive for 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).

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: Why ethane stopped trading like crude and started trading like nat gas (part III))

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.

(Read more: Natural gas continues to lose market share to coal year-over-year due to price gains)


Positive short-term catalyst, but prices remain relatively low

This past week, natural gas prices were up, which was a positive short-term catalyst. 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 natural gas prices.

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