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Natural Gas Prices Volatile Due to Excess Supply

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Jan. 5 2016, Updated 10:04 a.m. ET

Natural gas price action 

The US natural gas futures contracts for February delivery fell by 0.43% and closed at $2.3 per MMBtu (British thermal units in millions) on January 4, 2016. Prices fell due to sentiments caused by record inventories. The United States Natural Gas ETF (UNG) also fell by 1.6% and closed at $8.5 as of January 4, 2016.

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Inventory and weather update

WSI Corp reported that weather would be colder than normal for the next two weeks. Weather is expected to be colder in the central parts of the United States during this period. Cold weather could improve natural gas demand due to a rise in heating needs. However, winter weather that’s warmer than normal has led to fewer draw-downs of natural gas stocks this winter. Consequently, they are weighing on natural gas prices.

For the week ending December 25, 2015, the EIA (U.S. Energy Information Administration) stated that the US weekly natural gas inventory fell by 58 Bcf (billion cubic feet). The better-than-expected fall in natural gas stocks supported natural gas prices last week. However, long-term record inventory is weighing on gas prices. We’ll talk more about natural gas production and inventory the next part of this series.

Impact

Natural gas prices have fallen by more than 19% in 2015 due to long-term oversupply concerns. Prices tested a 16-year low in December 2015 due to weak demand caused by a warm winter. Historically low prices for natural gas affect the margins of natural gas producers like Cimarex Energy (XEC), EXCO Resources (XCO), Anadarko Petroleum (APC), Rex Energy (REXX), and Gulfport Energy (GPOR). The ups and downs in the energy market also affect ETFs like the Fidelity MSCI Energy ETF (FENY), the PowerShares DB Energy ETF (DBE), and the PowerShares DWA Energy Momentum ETF (PXI).

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