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Key insight: Why natural gas prices remain bearish

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Dec. 4 2020, Updated 10:52 a.m. ET

Natural gas price movement

Natural gas prices started the week by falling ~2.4% to $3.67 MMBtu (million British thermal units) on Monday. This was the lowest close in 11 months.

WSI Corporation reported temperatures might be warmer than normal in the contiguous U.S. from October 26 to November 4. Warmer weather results in less demand for natural gas as a fuel. Strong injections continue, further pressuring prices.

Read the previous part of this series to learn about the Energy Information Administration’s latest storage injection report.

On Tuesday, however, prices rebounded after the National Hurricane Center reported a 50% chance that a tropical weather system could form in the next five days in the Western Caribbean. This could disrupt output.

Prices climbed 1% to close at $3.71 on Tuesday.

The increase was short-lived, as prices fell back again on Wednesday after swinging between gains and lows. Weather forecasts remain inconsistent and therefore unpredictable.

Natgasweather.com, in its Wednesday update, noted, “Without being consistent from one run to the next, the markets are going to have a tough time believing exactly what’s going to take place.”

Prices closed at $3.66 on Wednesday. Prices continued to drop the next day and closed at a new 11-month close of $3.62 on Thursday.

Background

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Gas inventories increased to 3.393 trillion cubic feet (or tcf) on October 17 from lows of 1.887 tcf in March. Inventory gains have been consistently topping the five-year weekly averages for 27 weeks straight. This remarkable build in U.S. natural gas stocks has been driven by the booming supply from the shale gas revolution.

We’ll discuss the booming U.S. natural gas production in the next part of this series.

Key stocks and ETFs

Natural gas prices affect the margins of producers like Chesapeake Energy (CHK), Devon Energy (DVN), EOG Resources (EOG), and Cabot Oil and Gas (COG). All these companies are components of the Energy Select Sector SPDR ETF (XLE).

Learn more in Market Realist’s Why investors closely monitor natural gas inventories.

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