Understanding the Natural Gas Inventory Spread: Will Prices Rise Further?



Inventory spread

In the week ended September 1, 2017, natural gas inventories rose 65 Bcf (billion cubic feet) to 3,220 Bcf, based on the EIA (US Energy Information Administration) data released on September 7, 2017. The market had expected a rise of 63 Bcf.

On September 7, 2017, natural gas prices fell 0.6% following this inventory data.

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Inventory spread

Current natural gas inventories at levels above the five-year average could become a concern for natural gas bulls. If the spread rises, natural gas prices could fall. But if the spread falls, it could boost natural gas prices.

For example, in the week ended March 4, 2016, natural gas inventories were 41.5% above their five-year average. During the same week, natural gas active futures plunged to their 17-year-low closing prices.

In the week ended September 1, 2017, the spread rose by 20 basis points, but since the release of inventory data on September 7, natural gas prices have risen 2.6%. Higher temperatures boosted natural gas prices, despite the higher-than-expected rise in inventories, and natural gas inventories were still 6% below their level­s last year at the same time—another bullish factor for natural gas prices.

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Market expectations

Based on market expectations, natural gas inventories could rise by 80 Bcf for the week ended September 8, 2017. Last year, during this time period, inventories rose 62 Bcf.

The EIA will report the next natural gas inventory data on September 14, 2017. Any rise below 48 Bcf could reverse the natural gas inventories spread, and inventories would then fall below their five-year average. This would be a strong bullish event for US natural gas futures.

However, even if the inventory spread flipped, it might have only a mild impact in the short term on broader market indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). In the short term, natural-gas-weighted stocks like Rice Energy (RICE), Antero Resources (AR) and WPX Energy (WPX) could be only marginally impacted by fluctuations in the inventory spread.


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