Thanks to an unusually cold start to winter, natural gas prices rose to a seven-month high last week. The drop in temperature drove heating demand among residential and commercial consumers, pushing natural gas prices higher (read: Natural Gas ETF Warms up on Cool Weather).
Moreover, lower storage volumes had put pressure on the supply front, aiding natural gas prices to rise higher. The recent report by the U.S. Energy Information Administration (EIA) reinforced the same as the natural gas inventory level fell by 81 billion cubic feet (bcf) for the week ended Dec 6, bringing the current inventory tally to 3,533 bcf.
The current inventory is around 7.7% below the year-ago level and almost 3.7% lower than the five-year average.
The Weather Outlook
However, the month-long rally in natural gas prices surprisingly came to a halt towards the end of last week, as meteorologists predict mild temperatures ahead, a situation which could slash demand for natural gas.
The Christmas week weather is expected to stay normal as against below-normal temperatures predicted earlier.
Due to this situation, natural gas futures faced weak trading during Monday’s session, with front month futures falling 1.7%. This pushed November futures down to $4.279/mm BTU, a loss of 7.2 cents, on yesterday’s trading session.
Even though the recent outlook calls for milder weather, experts believe that the next inventory report scheduled to be out on Dec 19 might also report a drop in inventory levels. The prediction suggests that the supply pressure might continue for a while, relieving natural gas prices for the time being.
The EIA also forecasts that gas prices will be higher than the year-ago level thanks to lower natural gas inventories and higher household heating demand. The “World Energy Outlook” brought out by EIA has a long-term bullish opinion on natural gas (read: Natural Gas ETFs in Focus on Huge Supply Boost).
IEA expects fossil fuel usage to soar in the upcoming years, thereby dominating the market. The agency expects as much as 75% of global energy demand by 2035 to be met by fossil fuels. Hence, natural gas, a cheap and abundant fossil fuel, is expected to be a major beneficiary.
ETF in Focus
The recent slump in natural gas futures prices led to a 2.7% fall in the United States Natural Gas Fund (UNG - ETF report). However, analysts still have a bullish outlook on natural gas futures as they expect stockpiles to continue depleting (see: all the Energy ETFs here).
Investors willing to build long positions in natural gas futures via the ETF route could use this dip as a buying opportunity.
Launched in April 2007, it seeks to replicate the performance, net of expenses, of natural gas. The ETF does not track any particular index but tries to match its performance relative to the daily changes in the price of natural gas future contracts.
The product is rich in AUM, with an asset base of $956.6 million and is one of the most popular ETFs in the oil and gas space (also read The Key Differences Between Natural Gas ETFs).
Freezing temperatures throughout the U.S. during the last month led to a surge in prices of natural gas, which caused this ETF to jump 16%. Also, this ETF is up 10% in the year-to-date time frame.
Natural gas has seen some rough trading in the last two trading sessions as the weather forecast turned to mild from cool winter temperatures. However, if the mercury dips more than expected, natural gas prices might continue with their short term uptrend.
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