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Can the Natural Gas Inventories Spread Rescue Natural Gas Bulls?

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Natural gas inventories

In the week ended June 23, 2017, natural gas inventories were at 2,816 Bcf (billion cubic feet)—46 Bcf more compared to the week earlier, based on the EIA’s (U.S. Energy Information Administration) report released on June 29, 2017.

Inventories rose less than the market’s expectation of a 50 Bcf rise, but they were higher compared to the rise of 37 Bcf in the week ended June 24, 2016. On June 29, 2017, natural gas (FCG) (BOIL) August futures settled 1.7% lower compared to their previous settling price.

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What about the natural gas inventories spread?

Usually, a rise in the natural gas inventories spread, that is, a rise in the difference between natural gas inventories and their five-year average, is an indication of weaker natural gas prices.

In the last ten years, natural gas inventories have been lower than their five-year average in only a few instances. Natural gas prices have been trending downward since 2008. On March 3, 2016, natural gas prices settled at a 17-year low. In the week ended March 4, 2016, natural gas inventories were 41.5% above their five-year average.

What happened in the trailing week?

In the week ended June 23, 2017, the natural gas inventories spread was 6.9%, compared to 8.1% in the week before. However, between June 29 and July 5, 2017, natural gas August futures fell 6.6%.

Further, on a year-over-year basis, natural gas inventories have fallen 10.2%. The contracting inventories spread and inventories’ being below the previous year’s level could limit natural gas’s downside. Both metrics point to a tightening in the natural gas demand-supply balance.

A limit to natural gas’s downside could bring some relief for energy investors in ETFs such as the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3x ETF (DRIP), the iShares US Energy ETF (IYE), the ProShares Ultra Oil & Gas ETF (DIG), and the Vanguard Energy ETF (VDE).

Market estimates

Last year, natural gas inventories rose 39 Bcf in the week ended July 1, 2016. Analysts’ forecasts suggest a rise of 61 Bcf in natural gas inventories for the week ended June 30, 2017. If inventories have risen by 61 Bcf as expected, they’ll be 9.5% lower than last year’s levels and 6.5% higher than the five-year average. 

Such a rise would mean a further fall in the inventories spread compared to the week ended June 23, 2017. A fall in the spread could help ease the current bearish momentum in natural gas prices.

The EIA will report natural gas inventory data for the week ended June 30, 2017, on July 7, 2017.

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