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Natural Gas Inventories and Why They’re Bearish for Prices

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Last week’s natural gas inventory data

According to data from the EIA (US Energy Information Administration) released on March 16, 2017, natural gas (UNG) (FCG) (GASL) inventories fell by 53 Bcf (billion cubic feet) during the week ending March 10, 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.

By contrast, between December 2013 and April 2014—when inventory levels fell short of the five-year average by the largest volume 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 thus be linked to higher inventories as 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 its widest since April 2012. However, the spread narrowed in subsequent months. In the week ending on December 16, 2017, inventories fell below their five-year average for the first time in 19 months. Natural gas active futures prices rose 53.9% between April 1, 2016, and March 22, 2017.

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The spread reversed in the week ending January 27, 2017. During the week ending March 10, 2017, natural gas inventories were at 2,242 Bcf—21.4% more than the five-year average. In the six weeks since the reversal, natural gas prices have lost 11.2%. However, inventories are 9.5% lower than they were last year, which should ensure that prices don’t fall to the lows we saw at that time.

Market estimates

It will be interesting to see the impact of the EIA’s inventory data for the week ending March 17, 2017. The data will be released on March 23, 2017. Analysts’ estimates suggest a fall of 147 Bcf in natural gas inventories for the week ended March 17, 2017. If the actual decline falls short of expectations, it would be bearish for natural gas prices.

Natural gas prices and energy ETFs

Remember, natural gas prices specifically 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), the iShares US Energy (IYE), the 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 extent to which the US dollar drives natural gas prices.

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