Inventories spread and natural gas prices

In the week ending August 10, the negative inventories spread, which is the difference between natural gas inventories and their five-year average, was at -20%. The inventories spread expanded by almost 50 basis points compared to the previous week. On August 16, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending August 10.

Higher Inventory Might Support Natural Gas Prices

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

Since August 16, natural gas September futures have risen 2.5%. During this period, natural gas–weighted stocks Chesapeake Energy (CHK), Southwestern Energy (SWN), and Range Resources (RRC) rose 7.3%, 7.4%, and 7.7%, respectively, and outperformed their peers.

On August 16–21, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) rose ~3.5% and ~1.4%, respectively. These ETFs hold natural gas producer stocks.

Inventories might boost natural gas prices

On August 23, the EIA is scheduled to release its natural gas inventory report for the week ending August 17. Any rise below ~41 Bcf could push the inventories spread further into the negative territory, which might push natural gas prices higher.

In fact, analysts at Reuters estimated a 41 Bcf rise in natural gas inventories last week. If the EIA’s report is in line with analysts’ estimates, then the inventories spread might stay at a constant level. However, the expansion would be the seventh consecutive instance that the additions to natural gas inventories are lower compared to their five-year average change for this time of the year—a factor that could please natural gas bulls.

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