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Why Natural Gas Bulls Should Stay Cautious

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Why Natural Gas Bulls Should Stay Cautious PART 1 OF 5

Why Summer of 2017 Could Let Natural Gas Bulls Down

Natural gas prices

In the last five trading sessions, natural gas (UNG) (BOIL) (FCG) May futures fell 0.1% and closed at ~$3.19 per MMBtu (million British thermal units). On April 19, 2017, natural gas prices rose 1.3%. Natural gas rose due to a cooler weather forecast. Natural gas has traded between $3.11 and $3.25 per MMBtu in the past five trading sessions.

Why Summer of 2017 Could Let Natural Gas Bulls Down

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In the trailing week, the Energy Select Sector SPDR ETF (XLE) fell 4%, while the S&P 500 Index (SPY) (IVV) (VNN) (SPX-INDEX) fell 0.3%. Energy accounts for 6.6% of the S&P 500 Index. US crude oil (USO) prices fell ~5% in the trailing week.

The S&P 400 Midcap 400 Index (IVOO) (MID-INDEX), which has 3.4% exposure to the energy sector, rose ~0.3% during this period. Energy accounts for 6.4% of the Dow Jones Industrial Average Index (DIA) (DJIA-INDEX). The Dow fell 0.9% between April 12 and April 19. The FTSE 100 Index (UKX-INDEX) (EWU) fell 3.2%, and the CAC 40 Index (PX1-INDEX) (EWQ) also fell 1.9% during this period. Oil and gas companies account for 14.1% of the FTSE 100 Index and 11.6% of the CAC 40 Index.

EIA expects slowdown in natural gas demand

In its Short-Term Energy Outlook released on April 18, 2017, the EIA (U.S. Energy Information Administration) projected that natural gas could account for 34% of the total electricity generation in the US this summer. Last year, it accounted for 37% of the US’s total electricity generation during the summer.

The EIA also forecasted that total electricity generation in the summer of 2017 could be 2.4% below the summer of 2016. Mild summer temperatures could reduce cooling degree days by 11% from their historic level in 2016.

On April 19, active natural gas futures were 24.4% above their 2017 low of $2.56 per MMBtu on February 21, 2017. When securities rise more than 20%, they’re technically considered to have entered a bull market. However, mild weather and rising oil rigs could be a concern for natural gas prices. We’ll discuss these factors more in later parts of this series.

Key moving averages

On April 19, 2017, natural gas futures for May delivery were trading ~0.6% below their 100-day moving average and 0.2% below their 20-day moving average. Prices near key moving averages could indicate uncertainty for prices at the moment. Fundamental factors will be key in deciding which way natural gas finally goes.

Series focus

In this series, we’ll analyze how fundamental drivers like the rig count, natural gas inventories, and the US dollar impact natural gas prices. We’ll also discuss what the natural gas futures forward curve might be indicating.

Natural gas price sentiment impacts ETFs like the ProShares Ultra Oil & Gas (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy (IYE), and the Fidelity MSCI Energy ETF (FENY).

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