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Enjoy the Mild Winter, and Watch Natural Gas Prices Drop

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Dec. 23 2015, Published 10:43 a.m. ET

Natural gas price movement  

January natural gas futures contracts fell by 1.2% and closed at $1.89 per MMBtu (British thermal units in millions) on Tuesday, December 22, 2015. US gas prices fell due to an unusually mild winter weather forecast. Gas tracking ETFs such as the United States Natural Gas Fund (UNG) fell by 1.8% and settled at $7.30 at the closing hours of trade on December 22.

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Weather forecast  

MDA Weather Services has reported that the weather will be unusually warmer than normal in the northeastern parts of the United States during the first week of January 2015. The long-term winter forecast also seems to be warmer than usual and milder than last year.

The heating degree days in the lower 48 US states is expected to be less than the 30-year average this winter and less than last year. Fewer heating degree days mean less demand for heating.

As a result, natural gas prices fell for the first time in the last three trading sessions. The fall in natural gas prices affects the margins of gas producers such as Rice Energy (RICE), Cimarex Energy (XEC), Chesapeake Energy (CHK), and Southwestern Energy (SWN). The mild winter forecast will also lead to less drawdown of natural gas inventory.

The EIA (U.S. Energy Information Administration) is scheduled to release its weekly natural gas inventory report on December 24, 2015. Last week, the natural gas stockpile fell by 34 Bcf (billion cubic feet) for the week ended December 11, 2015. The consensus of falling natural gas inventory could benefit natural gas prices. Read the next part of the series for more details on natural gas inventory.

Volatility analysis  

This is the fifth down day for natural gas prices in the last ten trading sessions. Prices fell by 1.9% more on the average down days than on the average up days. Gas prices had a mediocre performance with respect to other commodities in yesterday’s trade. Prices fell more than 35% in 2015 due to oversupply concerns. In contrast, the broader index, the SPDR S&P 500 ETF (SPY), outperformed natural gas prices.

ETFs such as the PowerShares DB Energy ETF (DBE) and the PowerShares DWA Energy Momentum ETF (PXI) were affected by the volatility in the oil and gas market.

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