The Rising Dollar: Is It Affecting Natural Gas Prices?



Natural gas and the US dollar

From November 9–16, 2016, natural gas (UNG) (DGAZ) December futures rose 2.8%. The US Dollar Index (UUP) (UDN) rose 1.8% during that period.

In the past five trading sessions, natural gas futures and the US Dollar Index moved in opposite directions three out of five times. But the correlation between the two over the past five trading sessions was 73.8%. So there wasn’t an inverse quantitative relationship between them during that period. The positive correlation is likely coincidental, given the short time frame.

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When the dollar falls, it makes commodities cheaper for importing countries, which boosts prices. In the past, US natural gas wasn’t exported. Historically, there wasn’t a relationship 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.

In February 2016, the United States started exporting natural gas in the form of liquefied natural gas from the lower 48 states to outside North America. President-elect Donald Trump’s aggressive energy policy could lead to higher production of natural gas, which could boost natural gas exports. But his policies could also mean the return of coal as a source of fuel for power generators, making even more gas available for exports.

So natural gas prices could develop a relationship with the US Dollar Index that’s similar to the relationship between crude oil and the US Dollar Index.

Natural gas price movements

On March 3, 2016, natural gas futures closed at $1.64 per MMBtu (million British thermal units), a 17-year low. From March 3, 2016, to November 16, 2016, natural gas active futures rose ~68.5%, while the US Dollar Index rose 0.80%. In that period, the US Dollar Index and natural gas prices moved in opposite directions based on the closing prices in 95 of 180 trading sessions. The correlation was -11.4% during that period. It shows the lack of a relationship between the two over a longer period.

The dollar isn’t contributing to movements in natural gas right now.

Impact on ETFs

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


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