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Inventories Spread: Natural Gas Prices Could Rise

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Inventory data

In the week ending July 14, 2017, natural gas inventories rose by 28 Bcf (billion cubic feet) to 2,973 Bcf. The market expected a rise of 39 Bcf for the week ending July 14, 2017. The EIA reported the inventory data on July 20, 2017. On the same day, natural gas September futures fell 0.7%. During the same week in 2016, inventories rose by 34 Bcf.

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Inventories spread

The difference between natural gas inventories and their five-year average (or the inventories spread) is an important indicator for natural gas prices. Usually, when the difference expands (inventories being higher than the five-year average), natural gas prices tend to be weaker. The spread expanding means that natural gas supply is exceeding demand. On the other hand, a contraction in the spread could push natural gas prices higher.

When the spread has been negative (inventories have fallen below the five-year average), natural gas (FCG) prices have been very strong. It means that demand is outstripping supply. The above graph illustrates the relationship between the inventories spread and natural gas prices.

Based on the most recent data, the inventories spread fell to 5% from 6.2% the previous week. Since the EIA’s natural gas inventory data announcement on July 20, 2016, natural gas September futures have fallen 3.9%. As we discussed in Part 1 of this series, mild weather was responsible for the fall in natural gas. The falling inventories spread along with inventories being 9.1% below last year’s level could increase natural gas bulls’ confidence.

Market estimates for natural gas inventories

The market expects a rise of 28 Bcf in natural gas inventories for the week ending July 21, 2017. During the same period in 2016, inventories only grew by 17 Bcf. If inventories grow by 28 Bcf, the inventories spread would fall more. It could bring some support for natural gas prices that have been weak lately.

However, any upside in natural gas prices might not help natural gas–weighted stocks such as EQT (EQT) and Rice Energy (RICE) in the short term. So, broader equity indexes, the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) might not catch the possible gains in natural gas prices in the short term either.

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