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Why natural gas prices traded up last week but remain at lows

Ingrid Pan, CFA

Natural gas prices closed slightly up on the week

The front month contract for natural gas priced at Henry Hub closed at $3.66 per MMBtu (millions of British thermal units) on November 15—up very slightly from the prior week’s close of $3.56 per MMBtu.

Natural gas had fallen earlier in the week as a report released by the US Energy Information Administration showed that natural gas inventories had built more than expected, implying higher-than-expected supply, lower-than-expected demand, or both. Later in the week, prices recovered as cold weather was forecast and traders anticipated that the chillier temperatures would boost demand for natural gas since it’s used as a home heating fuel.

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).

Weather is an important demand factor in the winter

As winter approaches, 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 last week’s cold weather was a major positive for 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. The graph demonstrates that the companies’ valuations are closely related to the price of natural gas.

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

This past week, natural gas prices were slightly up, which was a positive indicator. 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.

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