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Natural Gas Recovery: Will the Dollar Index Play a Crucial Role?

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US Dollar Index can influence natural gas futures

As a globally consumed commodity, natural gas should be negatively correlated with the US Dollar Index. A stronger dollar implies more expensive natural gas for consumers in other currencies. Until recently, US natural gas wasn’t traded globally. The recent recovery in natural gas prices was due to the U.S. Energy Information Administration’s lower production estimates and the forecast for colder temperatures in the following weeks. Although the dollar also weakened, that wasn’t the primary driver of natural gas prices.

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US Dollar Index and natural gas correlation

The rise in natural gas (UGAZ)(BOIL)(UNG)(FSL)(GASL) prices since March 4, 2016—although negatively correlated with the US Dollar Index (UUP)—was low at -32% on April 20, 2016. When natural gas was near its 18-year lows before March 4, 2016, the correlation was positive. The US Dollar Index fell due to the Fed’s cautious stance on the timing of the interest rate hike. Natural gas futures were impacted by high inventory levels during a warmer-than-usual winter. Although the correlation between natural gas and the US Dollar Index isn’t straightforward, an analysis of the relationship could be useful to understand the effect of the dollar on natural gas–weighted stocks such as EXCO Resources (XCO), Ultra Petroleum (UPL), Antero Resources (AR), and others.

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