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Must-know: Why natural gas prices slumped sharply to ~$3.95

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A slump

Natural gas futures prices fell sharply last week to settle at ~$3.95 per Btu (British thermal unit). This decline was primarily due to a larger-than-expected increase in natural gas stockpiles.

For the week ended July 11, the EIA reported an injection of 107 billion cubic feet (or bcf) compared to analyst estimates of a 99 bcf rise. This was the 13th straight week of above-five-year average injections and the latest of several surpassed estimates of the summer.

Weak summer demand

Historically, natural gas inventories rise after the winter heating season. But the EIA reported that last week’s increase was 65% higher than the five-year average for this time of year, reflecting the very strong supplies fed by the shale boom.

This is one of the main reasons why natural gas prices continue to weaken even though inventories remain roughly 26% below historical levels—as you can see in the chart above—following the exceptionally cold winter, when prices touched ~$6 per Btu.

Pressure from the other side has also been strong. A cooler-than-expected summer has led to low natural gas demand.

Outlook

Strong supplies combined with weak summer cooling demand has left the market very comfortable with inventory expectations before the winter. This in turn brought about last week’s decline to the lowest levels since November 2013, when prices averaged $3.62 per Btu.

Natural gas prices are important for natural gas producers like Chesapeake Energy (CHK), Southwestern Energy (SWN), and Quicksilver Resources (KWK). These producers are generally components of U.S. energy ETFs like the Energy Select Sector SPDR Fund (XLE). Investors can also gain exposure to natural gas through the U.S. Natural Gas Fund (UNG).

Lower natural gas prices are a negative for these producers. To find out more about the correlation between natural gas prices and natural gas production, read the Market Realist article Why natural gas production and prices have strong ties.

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