An Analysis of Falling Natural Gas Prices in 2015: So Far, and What's to Come
(Continued from Prior Part)
US natural gas prices
US natural gas prices fell by ~5.1% between Friday, September 25, and Thursday, October 1. Prices closed at $2.433 per MMBtu (British thermal units in millions) on October 1, and prices closed at $2.564 per MMBtu on September 25.
Lower natural gas prices are negative for natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), QEP Resources (QEP), and Cabot Oil & Gas (COG), because these companies make less money when natural gas prices fall. All these companies combined make up ~2% of the Vanguard Energy ETF (VDE).
With lower prices, natural gas producers may be inclined to produce less. This inclination, in turn, would be negative for the energy transportation MLP (master limited partnership) sector, which includes companies such as MarkWest Energy Partners (MWE), because lower production would mean lower volumes to transport and, thus, lower MLP revenues.
Natural gas weekly price recap
The October natural gas futures contract expired on September 28. The actively traded November contract gained 1.4%, settling at $2.67 per MMBtu that same day. But prices gained on colder weather forecasts, which could spur heating demand.
However, after weather forecast began to moderate on September 29, fizzling out expectations of a strong heating demands, prices fell by 3.1% to settle at $2.586 per MMBtu. Milder weather forecasts continued to push prices even lower on September 30, when prices fell by ~2.4% and settled at $2.524 per MMBtu.
Then, on October 1, 2015—even despite the promising EIA (US Energy Information Administration) report—prices continued to fall. The EIA report actually showed that storage inventory numbers had increased less than market expectations. Prices still fell by 3.6% and settled at $2.433 per MMBtu—the lowest level for natural gas prices in three years.
The October 1 decline was likely because last week’s addition put natural gas stocks 14.7% higher than their previous year levels—4.5% higher than the five-year average level. This, as we discussed in Part 1, is bearish for prices. In addition, the threat of Hurricane Joaquin reaching the US East Coast could prolong above-normal temperatures, which could also push natural gas prices lower.
On early Friday, October 2, prices held near the same levels. Read on to the next part of this series, wherein we’ll look at how various securities exposed to natural gas performed last week.
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