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Will Trade Based on Buying Natural Gas and Selling Oil Unwind?

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Will the trade unwind?

With the production cut agreement that’s set to be implemented in 2019, US crude oil’s downside could be limited. Traders think that the recent flow of funds from oil to the natural gas market might stop, which could be a negative development for natural gas prices.

In November, US crude oil prices fell 22%, while natural gas futures rose 41.4%. Oversupply concerns also played an important role in oil’s fall. During this period, natural gas inventories are at a double-digit deficit to the five-year average in percentage terms, which might have helped natural gas rise this winter.

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Natural gas

On December 11, natural gas January futures fell 3% and settled at $4.41 per million British thermal units. The weather forecast suggests warmer weather until December 22—a factor that might have dragged natural gas prices.

In the last trading session, the S&P 500 Index (SPY) was flat, while the Dow Jones Industrial Average Index (DIA) and the S&P 400 Mid-Cap Index (IVOO) fell 0.2% and 0.3%, respectively. The oil and gas constituents of these equity indexes could be impacted by movements in energy commodities.

Natural gas prices could be important for integrated energy stocks like ExxonMobil (XOM) and Chevron (CVX). Their upstream businesses operate with a production mix of ~39% in natural gas.

Important price points

On December 11, the natural gas active futures were 18.2%, 33.4%, and 44.5% above their 50-day, 100-day, and 200-day moving averages, respectively. On the same day, natural gas prices were on par with their 20-day moving average. If natural gas prices break this level, a short-term weakness might continue in natural gas prices.

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