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Natural Gas Inventories Spread: What Does It Suggest for Prices?

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Last week’s data

According to data from the EIA (U.S. Energy Information Administration) released on December 29, 2016, natural gas (UNG) (GASX) (UGAZ) inventories fell by 237 Bcf (billion cubic feet) during the week ending December 23, 2016—compared to the previous week.

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Natural gas inventories and prices   

Natural gas prices are impacted by the spread between natural gas inventories and their five-year average. 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 December 2013 and April 2014, when 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.

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Recent natural gas inventories and prices

The spread between natural gas inventories and their five-year average had been narrowing over the last few months. Currently, inventories are below their five-year average. At the start of the injection season, on April 1, 2016, the spread was at its highest level. Since then, the spread has fallen 91%. Natural gas active contract prices rose 67% during that period.

However, oil rigs and natural gas rigs have been rising lately. It could mean an additional supply of natural gas coming to the market in the future. We looked at the impact of rigs on natural gas prices in the previous part of this series.

During the week ending December 23, 2016, natural gas inventories were 3,360 Bcf—2.3% lower than the five-year average and 10.9% lower than the level last year.

It will be interesting to see the impact of the EIA’s inventory data for the week ending December 30, 2016. The data will be released on January 5, 2017. Analysts expect a fall of 97 Bcf in natural gas inventories for the week ending December 30, 2016.

Natural gas prices and energy ETFs

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

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

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