Inventories Spread: Is More Upside Left for Natural Gas?

Inventory data

In the week ended October 27, 2017, natural gas inventories rose 65 Bcf (billion cubic feet) to 3,775 Bcf. The EIA (U.S. Energy Information Administration) reported natural gas inventories on November 2, 2017. The rise was 2 Bcf more than what the market expected. However, that same day, natural gas prices rose 1.5%.

Inventories Spread: Is More Upside Left for Natural Gas?

Inventories spread

The difference between natural gas inventories and their five-year average, or the inventories spread, could be vital for natural gas prices. Natural gas inventories below their five-year average could help natural gas prices rise. A sustained fall in natural gas inventories below their five-year average could boost natural gas prices.

In the week ended October 27, 2017, natural gas inventories were 1.1% below their five-year average. In the same week, the inventories spread contracted by 10 basis points compared to a week ago. On November 2, 2017, the day the EIA reported inventory data to date, natural gas prices rose 8.2%. In Part 1 of this series, we looked at the factors that helped natural gas rise.

Market forecast

Last week, the market expected a rise of only 15 Bcf in natural gas inventories. In the same period in 2016, inventories rose 54 Bcf. The EIA report will come out on November 9, 2017. A rise below 86 Bcf could keep the inventories spread in the negative. A rise up to 43 Bcf could push the inventories spread more in the negative.

In this short span, equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) may not catch the trend in the inventories spread because natural gas–weighted stocks for Rice Energy (RICE), Chesapeake Energy (CHK), and Range Resources (RRC) often follow oil more than natural gas prices.