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Natural Gas Prices Cool with the Temperature

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Natural gas prices

In the last five trading sessions, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) November futures have fallen 4.2%. They closed at ~$3.00 per MMBtu (million British thermal units) on September 28, 2016. They were ~1.6% less than the previous session.

The demand for natural gas in gas-fired power plants could fall because of cooler temperatures. Cooler weather led to the fall in natural gas prices on September 28, 2016. However, the market also expects the gap between the current inventory levels and historical averages to close—it could support prices. We’ll discuss this in detail in Part 3.

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Natural gas inventories

Last winter, natural gas usage for heating was weak due to 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.

The EIA (U.S. Energy Information Administration) projects that natural gas inventories will be ~4,042.4 Bcf (billion cubic feet) at the end of October 2016. This would be the highest level on record at the end of October. During the week ending September 16, natural gas inventories were at 3,551 Bcf—8.2% higher than their five-year average and 4.1% higher than the level last year.

Key moving averages

On September 28, natural gas futures were trading ~4% above their 100-day moving average and 0.6% above their 20-day moving average. This indicates the recent bullishness in natural gas prices. The above graph shows the price performance of natural gas futures relative to key moving averages.

Natural gas–related 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 US Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY).

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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