On September 27, natural gas prices declined 1% and settled at $2.40 per MMBtu (million British thermal units). The United States Natural Gas Fund LP (UNG) fell 2% on the same day. UNG follows natural gas prices. So far, in Q3 2019, natural gas prices have risen by 4.2%. In the first two quarters of 2019, natural gas prices declined by 9.5% and 13.3%, respectively.
However, the rise in demand for natural gas in this summer season might have lifted natural gas prices. Based on Reuters’ weather forecast model, natural gas demand could change between -6.1 Bcf (billion cubic feet) to 0.5 Bcf from the earlier forecast for the next two weeks. Lower demand could limit any upside in natural gas futures.
In the week ended September 27, the natural gas rig count declined by five to 148. It was the smallest level for natural gas rig count since March 3, 2017. The rig count also declined by 90.8% from record highs in 2008. However, the fall in the natural gas rig count might not help to lift natural gas prices. The oil rig count has risen almost 100% from 2008. It is behind the surge in natural gas production. Between January 2008 and June 2019, natural gas marketed production has risen 66.7%. In this period, natural gas active futures declined by 69.4%.
Inventory data and price target
On September 26, the EIA (US Energy Information Administration) reported a rise of 102 Bcf (billion cubic feet) in natural gas inventories for the week ended September 20. Reuters Poll estimated a rise of 89 Bcf. After the EIA data, natural gas active futures have fallen 1%. The government showed a higher rise than the market’s expectation.
Moreover, the negative inventories spread contracted 90 basis points on a week-over-week basis. This contraction is a negative development for natural gas futures. This will continue to limit any upside in prices next week. The inventories spread represents the difference between natural gas inventories and their five-year average.
Next week, natural gas active futures are expected to close between $2.27 and $2.49 per MMBtu (million British thermal units). The probability for this price range is 68%, assuming a normal distribution of prices. With the inventory and demand data, it is most likely that natural gas futures will remain near the lower limit of our price forecast next week. This price range was calculated with a natural gas-implied volatility of 41.1%.
Natural gas prices’ technicals
On September 27, natural gas active futures settled 3.8% and 1.2% above 50- and 100-day moving averages, respectively. But, on the same day, prices fell 4.3% below the 20-day moving average. Prices below this short-term moving average indicate short-term weakness. In fact, after the EIA inventory data, prices fell below this moving average for the first time since August 14. The 50-day moving average is 12.5% below the 200-day moving average. Moreover, if the gap between these moving averages expands, it might signal further weakness in natural gas prices.
Energy stocks’ correlations
In September, among natural gas-weighted stocks, Range Resources Corp. (RRC) and Gulfport Energy (GPOR), had the highest correlation of 88% and 77.4%, respectively, with natural gas. Natural gas-weighted stocks are energy stocks that operate with a production mix of at least 60% in natural gas. Moreover, these energy stocks are selected from the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
This month so far, natural gas active futures have risen by 5.2%. Additionally, RRC and GPOR rose by 12.9% and 20.8%, respectively. Among natural gas-weighted stocks, Chesapeake Energy (CHK) had a negative correlation of 25% with natural gas futures. Usually, CHK has a higher affinity for oil prices than natural gas prices. CHK fell 2.8%. In addition, US crude oil futures rose just 1.5% this month.