Inventories Spread: Why Natural Gas Uptrend Could Be at Risk

According to data from the EIA (U.S. Energy Information Administration) released on March 30, 2017, natural gas (GASX) (FCG) (GASL) inventories fell by 43 Bcf (billion cubic feet) during the week ending March 24, 2017.

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 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 be linked to higher inventories compared to the five-year average.

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 beginning 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, 2016, inventories fell below their five-year average for the first time in 19 months. Natural gas active futures prices rose 67% between April 1, 2016, and April 5, 2017.

The spread again reversed in the week ending January 27, 2017. During the week ending March 24, 2017, natural gas inventories were at 2,049 Bcf, 13.9% more than the five-year average. In the eight weeks since the reversal, natural gas prices have lost 3.7%. However, inventories are 17.1% lower than they were last year, which should ensure that prices don’t fall to the lows we saw at that time.

It will be interesting to see the impact of the EIA’s inventory data for the week ending March 31, 2017. The data will be released on April 6. Analysts’ estimates suggest a rise of ten Bcf in natural gas inventories for the week ending March 31, 2017. If the inventories spread expands, it would be bearish for natural gas prices.

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), 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.