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Why Natural Gas Prices Rallied despite Weak Demand Cues

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Natural gas prices

April natural gas futures contracts trading on NYMEX rose 4.7% and closed at $1.79 per MMBtu (million British thermal units) on Friday, February 26. Prices rose due to bargain buying despite long-term oversupply concerns. The United States Natural Gas ETF (UNG) rose 0.63% and settled at $6.36 on Friday. The SPDR S&P 500 ETF (SPY) fell that day.

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Weather update

Bearish traders continue to pressure natural gas prices due to mild weather forecasts. The latest forecasts suggest weather will be warmer than normal despite the peak winter season between November and March. Weather is expected to be mild for the next 15 days in several parts of the United States. The El-Niño weather pattern is responsible for the warmer-than-normal winter weather. It led to a fall in gas prices by 24% so far in 2016. Historically low crude oil prices impact the margins of natural gas producers like the Antero Resources (AR), Range Resources (RRC), Ultra Petroleum (UPL), EQT (EQT), Cabot Oil & Gas (COG), and Comstock Resources (CRK). 49% of US households use natural gas for heating. Mild weather should curb heating demand and affect natural gas prices.

Hedge funds

On February 26, 2016, the CFTC (U.S. Commodity Futures Trading Commission) reported that hedge funds and speculators increased their short positions for the week ending February 23, 2016. Bearish positions rose for the fifth time in the last six weeks. Net short positions rose by 15,382 contracts to 65,401 for the week ending February 23. Increasing bearish positions suggest that hedge funds are bearish on natural gas prices due to record inventory and mild weather.

ETFs and ETNs like the PowerShares DB Energy Fund (DBE), the VelocityShares 3x Inverse Natural Gas ETN (DGAZ), the Guggenheim S&P 500 Equal Weight Energy (RYE), and the Fidelity MSCI Energy ETF (FENY) are affected by the roller coaster ride in natural gas prices.

Read more about the natural gas inventory and rig count and gas price forecast in the next two parts of this series.

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