Assessing Whether the Inventories Spread Could Drag Natural Gas below $3
In the week ended September 8, 2017, natural gas inventories rose by 91 Bcf (billion cubic feet) to 3,311 Bcf, which was 11 Bcf above the rise expected by the market. The EIA (US Energy Information Administration) reported natural gas inventory data on September 14, 2017. On the same day, natural gas prices rose 0.4%.
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The inventories spread, or the difference between natural gas inventories and their five-year average, is a critical metric affecting natural gas prices. If the inventories spread expands, it could bring natural gas prices down. Conversely, any contraction could benefit natural gas prices.
For the week ended March 4, 2016, natural gas inventories were 41.5% above their five-year average. In the same week, natural gas active futures closed at their 17-year low. Since then, the spread has contracted to 96.9%, while natural gas prices have gained 88.8%.
Based on the latest week’s EIA inventory data, the inventories spread expanded by 80 basis points. However, since the release of this data, natural gas prices rose 0.8%. In Part 1 of this series, we detailed the factors that could have supported natural gas prices despite the inventories spread expanding marginally. Plus, inventories were 5.1% below the previous year’s level, which could help boost natural gas prices.
The market expects natural gas inventories to rise by 93 Bcf in the week ended September 15, 2017. Last year, during this period, natural gas inventories rose just 52 Bcf. The EIA is scheduled to report this natural gas inventory data on September 21, 2017.
However, a rise of this magnitude would again expand the inventories spread—a bearish driver for natural gas prices. A rise of less than ~73 Bcf could make the inventories spread flip, with inventories falling below the five-year average.
However, this could still have a limited impact on equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). Gas-weighted stocks such as Cabot Oil & Gas (COG), Antero Resources (AR), and Rice Energy (RICE) could be less impacted by the movement in natural gas prices.