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Why Natural Gas Inventories Could Dismay Natural Gas Bulls

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Inventories spread and natural gas prices

In the week ended August 17, the inventories spread was -19.7%. The inventories spread is the difference between natural gas inventories and their five-year average.  

The inventories spread contracted by ~30 basis points compared to the previous week. On August 23, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ended August 17.

Natural gas prices are usually inversely related to the inventories spread. However, this 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 an ample future supply instead of being concerned about demand getting out of hand.

Since August 23, natural gas October futures have fallen 3.7%. During this period, natural gas–weighted stocks Gulfport Energy Corporation (GPOR), Range Resources (RRC), and Chesapeake Energy (CHK) fell 1.4%, 2.4%, and 5.3%, respectively, and underperformed their peers.

Between August 23 and August 28, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) rose ~0.8% and ~1.0%, respectively. These ETFs hold the stocks of natural gas producers.

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Inventories might boost natural gas prices

On August 30, the EIA is scheduled to release its natural gas inventory report for the week ended August 24. Any increase that falls below ~47 Bcf (billion cubic feet) could push the inventories to spread further into negative territory, which could push natural gas prices higher.

However, Reuters analysts expected a rise in natural gas inventories of 60 Bcf last week. If the EIA’s report is in line with analysts’ estimates, then the inventories spread could contract to -19.3%, which might dismay natural gas bulls.

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