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Inventories Spread: Natural Gas Prices Could Make a U-Turn

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Inventory data

In the week ending August 4, 2017, natural gas inventories rose by 28 Bcf (billion cubic feet) to 3,038 Bcf. The EIA reported the natural gas inventory data on August 10, 2017. On the same day, natural gas prices rose 3.5%. The market expected a rise of 38 Bcf for the week ending August 4, 2017. During the same period last year, inventories rose by 29 Bcf.

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Inventories spread

When natural gas inventories rise above the five-year average (or inventories spread), natural gas prices usually fall. However, if the difference contracts, it could have a positive impact on natural gas futures.

On March 3, 2016, natural gas prices fell to the lowest closing price in 17 years. Natural gas inventories were 41.5% above the five-year average.

Based on the latest data, natural gas inventories are 2% above the five-year average. The difference was at 3% the previous week. On August 10, 2017, after the EIA reported the inventory data, natural gas (GASL) prices rose. However, natural gas prices fell 3.2% on August 10–16, 2017, due to the bearish weather forecast report that we discussed in Part 1.

Market estimates

Natural gas inventories could rise by 47 Bcf in the week ending August 11, 2017. Inventories rose by 22 Bcf during the same period last year. The EIA will report natural gas inventory data on August 17, 2017. Any rise up to 49.5 Bcf might not increase the inventories spread.

So, another fall in the natural gas inventories spread might boost natural gas prices. However, it could have little impact on natural gas–weighted stocks such as EQT (EQT) and Rice Energy (RICE) during the short term. Equity indexes such as the S&P 500 Index and the Dow Jones Industrial Average might ignore any rise in natural gas prices.

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