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Will Inventory Data Break the Natural Gas Support of $2.50 per MMBtu?

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Short-term demand drivers

According to LCI Energy, industry estimates suggest that gas flows to electrical power plants increased by 13% in 2015—compared to 2014. The lower natural gas prices are driving the demand for natural gas against coal. Many power plants are switching from coal to natural gas powered stations. This is leading to renewed demand for natural gas. Daily estimates suggest a marginal increase in gas flows to residential and commercial segments. However, industrial power plants’ gas flows dropped day-over-day.

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The EIA (U.S. Energy Information Administration) will release its weekly natural gas report today. Last week, US gas stockpiles rose to 1,476 Bcf (billion cubic feet) from 1,461 Bcf for the week ending April 3. The market estimates that the weekly gas stockpile will increase by 53 Bcf in today’s report. This is the highest increase in inventory estimates since November 6, 2014.

The massive inventory increase, oversupply concerns, and weak demand will test natural gas’ key support of $2.50 per MMBtu (British thermal units in millions). The support is formed from the lows of April 10 and 14 in 2015. In contrast, renewed demand from power stations switching to natural gas could drive gas prices to the next resistance of $2.70 per MMBtu. Prices hit this level in April 2015.

Gas prices are trading below their 20 and 50-day moving average of $2.67 per MMBtu and $2.74 per MMBtu. The RSI (relative strength index) is in overbought territory. This suggests that prices might fall.

Energy ETFs like the Spider Oil and Gas (XOP) and the Energy Select Sector SPDR ETF (XLE) mirrored the performance of natural gas prices. In contrast, oil and gas producers like Bill Barret (BBG), Laredo Petroleum (LPI), and Matador Resources (MTDR) increased more than 5% in the last five trading sessions. These companies’ production portfolios have an average natural gas production mix of 41% of their total production. They account for 4.46% of XOP.

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