Could Fall in Natural Gas Inventories Push Prices Higher?


Nov. 20 2020, Updated 1:55 p.m. ET

Inventory data

In the week ended January 12, 2018, natural gas inventories declined by 183 Bcf (billion cubic feet) to 2,584 Bcf. The EIA (U.S. Energy Information Administration) data came out on January 18, 2018. On the same day, natural gas prices fell 1.3%. The decline in natural gas inventories was 18 Bcf less than the markets expected, which could be behind the fall in prices.

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Inventories and their five-year average

Usually, the inventories spread influences natural gas prices inversely. The inventories spread or the difference between natural gas inventories and their five-year average is critical for natural gas prices.

In the week ended January 12, 2018, the inventories spread expanded in the negative territory by only 20 basis points. Natural gas prices rose 8% after the inventory data on January 18, 2018. This was mainly because of expectations of strong heating demand to come in the following weeks, as we discussed in the first part.

However, the fall in the inventories spread has also boosted natural gas prices lately, and a further expansion of the spread on the negative side could push prices up further.

Could fall in natural gas inventories push prices higher?

In the week ended January 19, 2018, the natural gas inventories level should be below 2,440 Bcf, so the inventories spread would expand further into negative territory. In other words, the fall in inventories should be greater than 144 Bcf in the EIA report to be released on January 25, 2018.

Energy stocks

However, energy stocks with at least a 60% production mix in natural gas like Cabot Oil & Gas (COG), Chesapeake Energy (CHK), EQT (EQT), and Range Resources (RRC) may be less affected by natural gas’s price fluctuations. So, the same could also be true for the S&P 500 Index (SPY).


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