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Natural Gas Prices: Will the $2 Wall Collapse?

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On August 8, natural gas prices rose 2.2% and settled at $2.13 per MMBtu (million British thermal units). The United States Natural Gas Fund LP (UNG), which follows natural gas prices, rose 1.7%. That day, the EIA (US Energy Information Administration) reported an increase of 55 Bcf (billion cubic feet) in natural gas inventories for the week ended August 2.

A Reuters poll estimated an increase of 59 Bcf for the same week. The smaller-than-expected increase in inventories pushed natural gas higher, but for how long?

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The negative inventories spread contracted by 50 basis points. The inventories spread indicates the difference between natural gas inventories and their five-year average. A contraction in the negative spread could drag prices going forward. Usually, the inventories spread and natural gas prices move inversely. According to Reuters, inventories are expected to rise 57 Bcf this week, which is higher than the five-year average rise of 42 Bcf.

If next week’s EIA data aligns with Reuters’ estimates, then the negative inventories spread could further contract by 30 basis points. Since August 2, Henry Hub natural gas active futures have fallen 0.2% through 9:30 AM EDT today. We expect prices to report a fifth consecutive weekly decline.

Natural gas price forecast

Based on the implied volatility of 39.1%, natural gas prices are expected to close between $2.03 and $2.23 per MMBtu between August 9 and August 15. The probability for this price range is 68%, and this price forecast is based on the normal distribution of prices. Given the circumstances, natural gas prices could inch toward the psychologically important level of $2.

If the $2 wall collapses next week, it could cast a shadow on energy stocks. Natural gas-weighted stocks Cabot Oil & Gas (COG) and EQT Corp. (EQT) could see further declines. On a year-to-date basis, COG and EQT have fallen 20.9% and 33.2%, respectively. Both these stocks operate with a production mix of over 90% in natural gas.

Range Resources (RRC) has dropped the most among natural gas-weighted stocks. Analysts reduced the target price on RRC just before its July 25 earnings results.

On August 8, natural gas prices were 5.4%, 8.6%, 14.7%, and 28.9%, respectively, below their 20-, 50-, 100-, and 200-day moving averages. Moreover, the negative difference between the 50-day and 200-day moving average is at its highest level since late January. Prices below the key moving averages and the expansion in the negative difference between 50- and 200-day moving averages suggest a bearish trend.

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