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Have Natural Gas Prices Turned Bearish?

PART:
1 2 3 4 5
Part 3
Have Natural Gas Prices Turned Bearish? PART 3 OF 5

Inventories Spread: Could Natural Gas Make a U-Turn?

Natural gas inventory data

In the week ended September 22, 2017, natural gas inventories increased 58 Bcf (billion cubic feet) to 3,466 Bcf, based on EIA (Energy Information Administration) data. This increase was 19 Bcf less than the market’s expected increase. However, natural gas November futures fell 1.4% after the inventory report on September 28, 2017.

Inventories Spread: Could Natural Gas Make a U-Turn?

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Inventories spread

The inventories spread, or the surplus of the natural gas inventories above their five-year average, could be important for natural gas prices. When the inventories spread expands, natural gas prices could decline, and vice versa.

In one such instance, natural gas inventories were 41.5% above their five-year average for the week ended March 4, 2016. In the same week, natural gas futures plunged to their lowest closing price in the last 17 years.

In the week ended September 22, 2017, the inventories spread contracted 80 basis points on a week-over-week basis. On September 28, 2017, the EIA reported this natural gas inventory data. However, bearish weather forecasts could be behind the 2.6% fall in natural gas prices between September 28 and October 4, 2017.

Market expectations

The market expects a rise of 56 Bcf in the natural gas inventories level for the week ended September 29, 2017. During the same period in 2016, natural gas inventories rose 80 Bcf. However, any rise up to ~92 Bcf would not increase the inventories spread.

Any rise that is less than 92 Bcf can narrow the inventories spread. Any changes in the inventories spread could be of less importance for natural gas–weighted stocks such as Range Resources (RRC), Antero Resources (AR), and EQT (EQTbased on their weak correlations with natural gas prices on a short-term basis.

Similarly, equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIAmay ignore the changes in the inventories spread.

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