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Why winter temperatures will affect natural gas prices

Ingrid Pan, CFA

Winter weather affects natural gas prices

Natural gas prices are especially affected by weather during the winter, as many households use natural gas for home heating. Warmer weather translates into less natural gas demand and, therefore, lower prices. Conversely, colder weather translates into more natural gas demand and higher prices. Natural gas prices affect the earnings of major domestic natural gas producers, such as Chesapeake Energy (CHK), Range Resources (RRC), Quicksilver Resources (KWK), and Southwestern Energy (SWN). Plus, many of these companies are part of energy ETFs, such as the Vanguard Energy ETF (VDE).

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Heating degree days were lower than normal last week

For the week ending October 5, heating degree days (as weighted by gas home-heating customers) for the US totaled 19 versus the normal figure for corresponding weeks past of 43. Heating degree days (or HDD) are a measure of how much colder than room temperature the weather is, and the greater the HDD figure, the colder it is. This week’s HDD figure was lower than normal, meaning weather was milder than normal, which implies less natural gas demand and, therefore, lower natural gas prices. The front month contract for Henry Hub natural gas closed at $3.51 per MMBtu (millions of British thermal units) on October 4, as compared to $3.59 per MMBtu a week earlier.

Recently, natural gas prices have responded to an anticipated cold snap

While last week’s weather was milder than normal, weather forecasting service WSI said it anticipated cold weather in the Midwest and East later this month. The front month contract for Henry Hub natural gas closed at $3.72 per MMBtu on Tuesday, up significantly from Friday’s levels, likely in anticipation of the growing demand for the commodity due to cold weather.

Watch the weather in the coming weeks as a major driver of natural gas prices

While natural gas has other demand drivers, such as electricity use, winter weather can be one of the biggest drivers of natural gas prices. So for investors with positions in natural gas–weighted companies, the weather during the winter months can be an important indicator to watch.

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