While investors have shifted their attention to AI, big tech, and growth stocks, year-to-date, the United States Natural Gas Fund (UNG) is down more than 42%. However, natural gas rose more than 5% Thursday. Below are 5 reasons natural gas has turned the corner.
Falling Dollar
Month-to-date, the Invesco DB US Dollar Index Bullish ETF (UUP) has dropped 1.72%. Though the move may not seem large, a drop of 1.72% is sizable for a currency. Because natural gas is most often priced in US dollars globally, a weaker US dollar can lead to higher natural gas prices. Furthermore, a weaker US dollar means higher costs for domestic natural gas producers that need to import production components. Finally, a weaker dollar can trigger investors to seek alternative assets, such as natural gas, to stave off currency depreciation and inflation.
Historically Warm Weather
Natural gas prices are highly correlated to weather patterns. For example, during a freezing winter, natural gas is a primary energy source for residential and commercial heating during colder months. Conversely, when the weather is sweltering, demand for natural gas increases dramatically as people use more air conditioning and cooling systems.
According to the New York Times, global average temperatures for July reached their highest level this year. Weather forecasts project higher-than-normal temperatures into next month.
Lower Output Levels on the Horizon?
Like any other commodity, natural gas prices are beholden to output. Though prices have dropped precipitously in 2023, output has remained high. However, production levels may have finally peaked. Wednesday, natural gas production fell by 1.8 BDCF (billion cubic feet per day) – marking the most significant single-day drop since the start of the year.
Decisive Technical Breakout
There is no greater indication of supply and demand than a simple price and volume chart. In a massive change of character, natural gas proxy UNG closed above its 10-week moving average for consecutive weeks for the first time since September 2022. Now, UNG is attempting to emerge out of a bull flag pattern.
Furthermore, natural gas stocks such as Chesapeake Energy (CHK), Range Resources (RRC), and Vital Energy (VTLE) exhibited relative strength by bucking Thursday’s market weakness.
EV Revolution to Spur Electric Demand
Tesla (TSLA), the king of electric vehicles, beat earnings expectations for a tenth straight quarter and reported record revenue of $25 billion. Clearly, widespread EV adoption is becoming a reality. Increased EV demand will lead to increased electricity demand and, thus, increased natural gas demand.
Chesapeake Energy Corporation (CHK): Free Stock Analysis Report
Range Resources Corporation (RRC): Free Stock Analysis Report
Tesla, Inc. (TSLA): Free Stock Analysis Report
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
United States Natural Gas ETF (UNG): ETF Research Reports
Vital Energy, Inc. (VTLE): Free Stock Analysis Report
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