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Is a Bear Market Coming for Natural Gas?

PART:
1 2 3 4
Part 3
Is a Bear Market Coming for Natural Gas? PART 3 OF 4

Inventories Spread: Could It Bring Some Relief for Natural Gas?

Inventory data

Natural gas inventories rose just 17 Bcf (billion cubic feet) to 2,990 Bcf in the week ended July 21, 2017. The market expected a rise of 28 Bcf. Last year, the addition to inventories was the same as this year. Bullish inventory data contributed to a rise of 1.8% in natural gas (FCG) futures on July 27, 2017, the day the EIA (U.S. Energy Information Administration) reported inventory data.

Inventories Spread: Could It Bring Some Relief for Natural Gas?

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Inventories spread

Natural gas inventories above the five-year average—the inventories spread—could be a concern for natural gas longs. If the surplus between inventories and their five-year average either contracts or reverses, it could boost natural gas prices. If it expands, prices would be pressured. The graph above demonstrates this relationship.

For example, on March 3, 2016, natural gas prices settled at their 17-year low. In the week ended March 4, 2016, inventories were 41.5% above their five-year average.

In the week ended July 21, 2017, the inventories spread contracted 1.1 percentage points. But since July 27, 2017, after the EIA reported the data, natural gas prices fell 5.4%, largely due to lower temperature forecasts. But a contraction in the inventories spread and inventory levels at 9.2% less than last year’s level could have helped limit losses in natural gas prices.

EIA data

Market surveys suggest a rise of 23 Bcf in natural gas inventories. But last year, in the week ended July 29, 2016, inventories fell 6.0 Bcf. If natural gas inventories rise 23.0 Bcf, the inventories spread could fall further. On August 3, 2017, the EIA will announce natural gas inventory data for the week ended July 28, 2017.

Changes in the natural gas inventories spread will be important for natural gas prices. However, its impact on natural gas–weighted stocks such as EQT (EQT) and Rice Energy (RICE) could be limited in the short term. If course, in the long term, natural gas prices will dictate the profits for such natural gas–producing companies. So even equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) are not likely to gain from any possible upside in natural gas prices in the short term but could be impacted by moves in the long term.

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