Natural Gas: Analyzing the Inventory Levels

In the week ending May 24, the inventories spread was -12.1%. During this period, the inventories spread contracted by ~1.4 percentage points compared to the previous week. On May 30, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending May 24. The inventories spread is the difference between natural gas inventories and their five-year average.

Since May 30, the natural gas July futures have fallen 5.1%. During the same period, natural gas–weighted stock Chesapeake Energy (CHK) fell 1.5% and underperformed its peers. The contraction in the negative inventories spread might have dragged Chesapeake Energy’s stock prices.

The natural gas price is usually inversely related to the inventories spread. However, the relationship seems to be more biased toward a price downside when inventories rise above the five-year average. The market might be confident about having enough future supply instead of being concerned about demand getting out of hand.

On June 6, the EIA is scheduled to release its natural gas inventory report for the week ending May 31. Any rise less than or equal to ~89 Bcf (billion cubic feet) could cause the inventories spread to expand more into the negative territory. However, analysts expect an addition of 101 Bcf, which would contract the negative inventories spread by ~0.5 percentage points—a concern for natural gas–weighted stocks.