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Inventories Spread: Will a Flip Save Natural Gas Bulls?

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Natural gas inventory

In the week ended September 29, 2017, natural gas inventories rose by 42 Bcf (billion cubic feet) to 3,508 Bcf, according to the EIA (US Energy Information Administration) report on October 5, 2017. The rise was 14 Bcf less than the market had expected. However, on the same day, natural gas prices fell 0.6% despite bullish inventory data.

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Inventories spread

The variation of natural gas inventories over their five-year average could be important for natural gas prices. The difference is known as the “inventories spread.” When inventories exceed their five-year average, the spread is positive. Any rise in the inventories spread could erode natural gas’s gains and vice versa.

For example, when natural gas prices settled at their 17-year low on March 3, 2016, natural gas inventories were 41.5% above their five-year average in the same week.

In the week ended September 29, 2017, the inventories spread flipped into negative territory, the first time since the week ended January 27, 2017. However, the flip in the inventories spread was not able to save natural gas prices from a 1.2% fall since the release of inventory data to date. We discussed the factors behind the natural gas fall in the trailing week in part one of this series. However, if this negative spread expands further, it could support natural gas prices.

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Market forecast

The market expects a rise of 74 Bcf in the natural gas inventories level for the week ended October 6, 2017. The inventory data for the same week will be released by the EIA on October 12, 2017. In the corresponding period last year, natural gas inventories rose by 79 Bcf.

In fact, for the negative spread in natural gas inventories to continue, the rise in natural gas inventories should be anything less than 95 Bcf. Moreover, any rise less than 87 Bcf would help the negative inventories spread to further expand.

However, changes in the inventories spread may not impact natural-gas-weighted stocks like Southwestern Energy Company (SWN), Range Resources (RRC), and WPX Energy (WPX) in the short term given their negative correlations with natural gas prices. Similarly, market indexes despite having some exposure to energy stocks like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) may also move independently of the inventory spread.

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