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Will Natural Gas Inventories Support Prices?

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Last week’s natural gas inventory data

According to data from the EIA (U.S. Energy Information Administration), natural gas (UNG) (GASX) (UGAZ) inventories fell by 152 Bcf (billion cubic feet) during the week ending February 3, 2017.

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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.

In contrast, 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 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.

Recent natural gas inventories and prices

Last winter, natural gas usage for heating was weak due to mild temperatures. At the end of March 2016, US natural gas inventories were at 2.5 trillion cubic feet—67.0% higher than the levels in 2015 and 53.0% higher than the five-year average. As a result, natural gas futures hit a 17-year low of $1.64 on March 3, 2016.

At the start of the injection season, on April 1, 2016, the spread between natural gas inventories and their five-year average was at the highest level since April 2012. The spread narrowed over the following months.

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Recently, inventories fell below their five-year average. During the week ending February 3, 2017, natural gas inventories were at 2,559 Bcf—1.8% lower than the five-year average and 11.3% lower than the level last year. Natural gas active futures prices rose 49.5% between April 1, 2016, and February 15, 2017.

Market estimates

It will be interesting to see the impact of the EIA’s inventory data for the week ending February 10, 2017. The data will be released on February 16, 2017. A Reuters poll suggests a fall of 124 Bcf in natural gas inventories for the week ending February 10, 2017.

Natural gas prices and energy ETFs

Notably, natural gas prices impact ETFs like the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3x ETF (DRIP), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), ProShares Ultra Oil & Gas (DIG), 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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