uploads///Natural Gas and Key Moving Averages

Natural Gas: Why Is It Ignoring Bullish Inventories?

Rabindra Samanta - Author
By

Aug. 18 2020, Updated 4:44 a.m. ET

Natural gas prices

In the last five trading sessions, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) futures have fallen by 9.8%. They closed at ~$2.56 per MMBtu (million British thermal units) on August 10, 2016—down ~2.1% compared to the previous session.

The fall coincides with forecasts of cooler temperatures compared to previous forecasts between August 13 and August 17 in the mid-continent and the southern parts of the US. According to Commodity Weather Group, the current forecast indicates hotter weather for the East Coast and Mid-Atlantic regions in the next two weeks. However, natural gas prices are in a downturn due to market expectations of the usual fall in natural gas consumption as the summer draws to an end. The summer will likely fall short of undoing the bearish pressure from strong supplies.

The above factors led to a fall of 9.8% in the natural gas active contracts despite the 6 billion cubic foot draw in inventory for the week ending on July 29, 2016.

On July 1, active natural gas futures hit a 2016 high of $2.99—the highest level since May 2015, on a closing price basis. Currently, natural gas is ~14.3% below its 2016 high.

Natural gas price movements impact natural gas–weighted stocks such as Memorial Resource Development (MRD), EXCO Resources (XCO), WPX Energy (WPX), Rex Energy (REXX), Comstock Resources (CRK), Southwestern Energy (SWN), and Range Resources (RRC).

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Why natural gas prices fell in early 2016

Last winter, natural gas usage for heating was weak due to the mild weather. As a result, prices were weak. At the end of March 2016, US natural gas inventories were at 2.5 trillion cubic feet—67% higher than the levels in 2015 and 53% higher than their five-year average. Natural gas futures hit a 2016 and 17-year low of $1.64 on March 3.

Key moving averages

On August 10, natural gas futures were trading ~8.5% above their 100-day moving average and 6.5% below their 20-day moving average. Prices below the 20-day moving average indicate short-term bearish sentiment for natural gas. The above graph shows the price performance of natural gas futures relative to key moving averages.

Natural gas sentiment also impacts ETFs such as the ProShares Ultra Oil & Gas ETF (DIG), the PowerShares DWA Energy Momentum Portfolio (PXI), the Vanguard Energy ETF (VDE), the iShares U.S. Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY).

Memorial Resource Development, EXCO Resources, WPX Energy, Rex Energy, Comstock Resources, Southwestern Energy, and Range Resources (RRC) had production mixes of 78.1%, 88.7%, 67.0%, 62.4%, 72.0%, 92%, and 71.2%, respectively, in natural gas.

In the next part of this series, we’ll discuss the crude oil rig count. We’ll see how it impacts natural gas production and prices.

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