uploads/2017/01/image005-3.png

Can Natural Gas Gain from a Drop in the Dollar?

By

Updated

Natural gas and the US dollar in the short term

From January 18, 2017, to January 25, 2017, natural gas (UGAZ) (DGAZ) March futures rose 1.6%. The US Dollar Index (UUP) (UDN) fell 0.9% during that period.

In the past five trading sessions, natural gas futures and the US Dollar Index moved in opposite directions two out of five times. The correlation between the two over the past five trading sessions was 37.2%. There wasn’t an inverse quantitative relationship between them during that short period.

When the dollar falls, it makes commodities cheaper for importing countries, which boosts prices. In the past, US natural gas wasn’t exported in large quantities outside North America. Historically, there wasn’t a relationship between natural gas and the dollar.

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

Article continues below advertisement

Natural gas and the US dollar in the long term

On March 3, 2016, natural gas futures closed at $1.64 per million British thermal units—a 17-year low. From March 3, 2016, to January 25, 2017, natural gas active futures rose ~104%, while the US Dollar Index rose 2.5%. During that period, the US Dollar Index and natural gas prices moved in opposite directions based on the closing prices in 124 of 227 trading sessions. The correlation was -10.5% during that period. It shows the lack of a relationship between the two over a longer period. So, other factors, like the weather, were driving movements in natural gas.

Natural gas and President Trump

President Trump’s aggressive energy policy could lead to higher natural gas production. It could boost natural gas exports. His policies could also mean the return of coal as a source of fuel for power generators. It would make even more gas available for exports.

So, as US natural gas becomes a more international commodity, prices could develop a relationship with the US Dollar Index that’s similar to the relationship between crude oil and the US Dollar Index.

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).

Advertisement

More From Market Realist