Why Natural Gas Pulled Back after Large Gains

Natural gas prices

In the last five trading sessions, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) October futures have risen by 8%. They closed at ~$2.89 per MMBtu (million British thermal units) on September 14, 2016. This is ~0.7% lower than the previous session.

Why Natural Gas Pulled Back after Large Gains

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 only ~3.3% below its 2016 high.

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 at the end of October 2016. This would be the highest end-of-October level on record. During the week ending September 2, natural gas inventories were at 3,437 Bcf—10% higher than their five-year average and 6% higher than the level last year.

The price correction on September 14 coincides with concerns that the next two weeks of hotter weather wouldn’t be able to reduce the pace of natural gas inventory gains.

Key moving averages

On September 14, natural gas futures were trading ~7.6% above their 100-day moving average and 3.1% above their 20-day moving average. This indicates bullishness in natural gas prices. 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 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.