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Natural Gas Bulls: Should You Watch Dollar Movements?

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Natural gas and the US dollar

Between October 12 and October 19, 2016, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) November futures fell ~1.2%. The US Dollar Index (UUP)(UDN) was flat during this period.

In the past five trading sessions, natural gas futures and the US Dollar Index moved in opposite directions in three instances. The correlation between the two over the past five trading sessions was -69.7%. So, there was an inverse quantitative relationship between the two during this period.

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When the dollar falls, it makes commodities cheaper for importing countries—this boosts prices. US natural gas wasn’t exported earlier. Historically, the relationship wasn’t observed between natural gas and the dollar. It will be interesting to see if natural gas and the dollar develop a more long-term fundamental relationship—like the one between crude oil and the dollar.

Notably, the US started exporting natural gas in the form of liquefied natural gas from the lower 48 states to outside North America in February 2016.

Natural gas price movements

On May 2, 2016, the US Dollar Index closed at 92.6—its lowest level year-to-date. Between May 2 and October 19, the US Dollar Index rose ~5.7%, while natural gas futures rose 55.2%.

Between May 2, 2016, and October 19, 2016, the US Dollar Index and natural gas prices moved in opposite directions based on the closing price in 59 out of 119 trading sessions. The correlation was -4.2% during this period. This shows the lack of a relationship between the two over a longer period.

So, the dollar probably isn’t contributing to movements in natural gas right now. However, regulatory changes that will lead to greater use of natural gas in the long term and natural gas exports will have a positive impact on natural gas prices in the long term.

Impact on ETFs

Natural gas prices impact ETFs such as the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3x Shares (DRIP), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the PowerShares DWA Energy Momentum Portfolio (PXI), the Vanguard Energy ETF (VDE), and the Fidelity MSCI Energy Index ETF.

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