Natural Gas Prices Are Falling Significantly, but Why?



Natural gas prices

In the last five trading sessions, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) December futures fell 8.0%. They closed at ~$2.79 per MMBtu (million British thermal unit) on November 2, 2016, which was about 3.8% lower than the previous session.

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Warm weather is impacting natural gas prices

The fall in natural gas prices is due to warmer-than-normal weather forecasts, despite the start of the winter season. It has curbed the demand for natural gas for heating purposes. In the last two trading sessions, natural gas futures fell 7.7% after forecasts indicated higher temperatures than the mean.

Natural gas inventories

Last winter, natural gas usage for heating was weak due to mild weather. At the end of March 2016, US natural gas inventories were at 2.5 trillion cubic feet, which is 67.0% higher than 2015 levels and 53.0% higher than their five-year average. As a result, prices were weak. Natural gas futures hit a 2016 and 17-year low of $1.64 on March 3, 2016.

The EIA (U.S. Energy Information Administration) projects that natural gas inventories will be ~3,965.67 Bcf (billion cubic feet) at the end of October 2016. That would be the highest level on record at the end of October.

During the week ended October 21, 2016, natural gas inventories were 3,909 Bcf, which is 4.9% higher than the five-year average and 1.3% higher than last year’s level. The EIA will announce inventory data for the week ended October 28, 2016, on November 3, 2016.

Key moving averages

On November 2, 2016, natural gas futures were trading ~12.8% below their 100-day moving average and 14.9% below their 20-day moving average. It shows the recent bearishness in natural gas prices.

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

In the next part of this series, we’ll look at crude oil and natural gas rig counts. We’ll see how they impact natural gas production and prices.


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