uploads///Forecast Indicating Warmer Week Ahead

How Does EI Niño Affect Natural Gas Prices?

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May. 23 2016, Published 6:08 a.m. ET

Mild weather ahead for natural gas

The weather forecast for May 23–29, 2016, indicates that temperatures could remain higher than the five-year average.

The mild weather forecast for May 24–29, 2016, could have a negative impact on natural gas (UGAZ) (BOIL) futures, as well as natural gas–weighted stocks such as EXCO Resources (XCO), Ultra Petroleum (UPL), and Antero Resources (AR).

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EI Niño anomalies

Natural gas usage for heating was reduced due to mild weather in the colder months. During the 2015–2016 winter, the high intensity of El Niño kept the weather warmer than expected. As a result, at the end of March 2016, the US natural gas inventory was at 2.5 trillion cubic feet. That’s 67% above 2015 levels and 53% above the five-year average. However, this summer could be warmer than expected because of El Niño, which could boost the use of natural gas in electricity generation as cooling demand rises.

In the week ending May 20, 2016, actual temperatures were higher than forecasts between May 16 and May 19. On May 20, the actual temperature was lower than forecasts. Thus, natural gas futures fell initially in the week, as temperatures rose above expectations. In the above graph, you can see how the weather affected natural gas prices last week.

In the final part of this series, we’ll look at crude oil’s price performance relative to natural gas and the S&P 500 Index (SPY) (SPXL).

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