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Dow Shines Despite Sharp Natural Gas Price Drop

By Travis Hoium – Feb 24, 2014 at 3:30PM

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Natural gas plunged Monday, but that didn't keep the Dow Jones Industrial Average or big energy stocks from having a great day on the market.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Investors woke up on right side of the bed this morning and the Dow Jones Industrial Average (^DJI 0.10%) was up 0.9% in late trading. There wasn't a lot of economic news, but mergers were a hot topic this morning.

RF Micro Devices agreed to buy TriQuint Semiconductor for $1.6 billion and Men's Wearhouse upped its offer for Jos. A. Bank to $63.50 per share. These actual or potential mergers may have given investors a reason to buy stocks after a few weeks of stagnant trading on Wall Street.  

Oil and gas pull in opposite directions
One of the strange moves of the day was the 12% drop in the price of the March natural gas contract, even as oil is up 0.5%. Natural gas is down so much today because temperatures in the Midwest and Eastern U.S. are moderating and aren't expected to be as bad as thought last week when natural gas prices jumped.

Rising oil prices haven't hurt demand for gasoline at stations like this one.

Oil, on the other hand, is far less volatile and has been steadily rising over the past month to nearly $103 per barrel. That's why shares of ExxonMobil (XOM -0.85%) and Chevron (CVX -0.80%) haven't reacted negatively to the movement in natural gas prices today. 

Today's loss may seem big, but natural gas is up from about $3.50 per million BTUs in November to $5.50 today, so the oil giants' natural gas operations are still going to be more profitable this quarter than they were in the fourth quarter of 2013. When near-term contracts for energy are coming due we can get some crazy moves, and that's one of the reasons natural gas is having a wild day. 

Volatility in the natural gas market
Oil and natural gas often get lumped together in the energy market, but they behave very differently in the real world. Natural gas can see very volatile demand when the weather gets particularly warm or cold because it is used in electricity generation and to heat homes.

Oil, on the other hand, is far less volatile because it is used primarily in transportation, where the cost to switch to an alternative or cut energy use is a much longer cycle. That demand volatility plays out in commodity markets with days like we've seen today.

Keep in mind that over the long term natural gas prices are slowly rising because drilling nearly came to a halt last year when prices dipped so low that new wells weren't economical to drill. The situation could even out if prices remain as high as they are today.

One month's contract doesn't make ExxonMobil and Chevron better or worse buys; instead, the long-term price trend is what matters. On that front both companies look to have a better 2014 than 2013.

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,429.88 (0.10%) $34.87
Exxon Mobil Stock Quote
Exxon Mobil
$109.86 (-0.85%) $0.94
Chevron Stock Quote
$181.03 (-0.80%) $-1.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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