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Natural Gas Storage Growth Slows: How to Place Your Bets

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Last week’s data

According to data from the EIA (U.S. Energy Information Administration) released on September 29, 2016, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) inventories rose by 49 Bcf (billion cubic feet) during the week ending September 23, 2016—compared to the previous week.

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Natural gas inventories and prices

Over the past ten years, whenever natural gas inventories have been higher than their five-year average, prices have fallen. On the other hand, between November 2013 and April 2014, as inventory levels fell short of the five-year average by the highest amount in the past ten years, natural gas prices rose to $6.14 per MMBtu (million British thermal units).

The downturn in natural gas prices since June 2008 could be linked to higher inventories compared to the five-year average. However, the weather also plays an important role in driving natural gas prices in the short term. Long-term production trends and inventory dynamics impact natural gas prices in the long term.

Recent natural gas inventories and prices

The spread between natural gas inventories and their five-year average has been narrowing over the last few months. For the injection season so far in 2016, the spread was at its highest in the week ending April 1, 2016. Since then, the spread fell 74.8%, while natural gas active contracts rose 55.4%.

However, traders are skeptical about the narrowing of the spread because both oil rigs and natural gas rigs keep rising. We discussed the impact of rigs on natural gas prices in the previous part.

During the week ending September 23, natural gas inventories were at 3,600 Bcf—6.5% higher than their five-year average and 2.6% higher than the level last year.

It will be interesting to see the impact of the EIA’s inventory data for the week ending September 30, 2016. The data will be released on October 6, 2016.

Natural gas prices and energy ETFs

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

In the next part of this series, we’ll analyze the US dollar’s role in driving natural gas prices.

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