Thursday, August 25, 2016

Is the US Dollar Impacting Natural Gas Prices?

Natural gas and the US Dollar Index

Between August 17 and August 24, 2016, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) October futures rose by ~6.6% and the US Dollar Index (UUP) rose by ~0.1%.
Is the US Dollar Impacting Natural Gas Prices?
In the last five trading sessions, natural gas futures and the US Dollar Index moved in opposite directions in two instances. The correlation between the two over the last five trading sessions was -50.2%. This could mean that movements in natural gas were influenced by movement in the US Dollar Index, apart from fundamental news. When the dollar falls, it usually makes commodities cheaper for importing countries—this boosts prices. However, US natural gas wasn’t exported earlier. Historically, this relationship wasn’t observed. It will be interesting to see if natural gas and the dollar develop a more long-term inverse relationship—like the one between crude oil and the dollar. The US started exporting natural gas in the form of liquefied natural gas from the lower 48 states to outside North America in February 2016.
Natural gas price movements
On May 2, 2016, the US Dollar Index closed at 92.6—its lowest level year-to-date. Between May 2 and August 24, the US Dollar Index rose by ~2.3%, while natural gas futures rallied by 38.8%.
Between May 2 and August 24, the US Dollar Index and natural gas prices moved in opposite directions based on the closing price in 41 out of 80 trading sessions. So, this isn’t enough evidence to point to an inverse relationship between the two, like the relationship between the US dollar and crude oil prices over the long term. A strong dollar makes crude oil expensive for crude oil–importing countries.

Impact on ETFs
Natural gas prices also impact ETFs such as the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares (DRIP), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the PowerShares DWA Energy Momentum Portfolio (PXI), the Vanguard Energy ETF (VDE), and the Fidelity MSCI Energy Index ETF (FENY).

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