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Higher EIA Inventory Data Might Be Bullish for Natural Gas

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Nov. 20 2020, Updated 5:21 p.m. ET

Inventories spread and natural gas prices

In the week ending on October 5, the inventories spread was -17%. The inventories spread is the difference between natural gas inventories and their five-year average.

The inventories spread contracted by 50 basis points compared to the previous week. On October 11, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending October 5.

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Natural gas inventories

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 enough future supply instead of being concerned about demand getting out of hand.

Since October 11, natural gas November futures have risen 0.5%. During this period, natural gas–weighted stocks Range Resources (RRC), Southwestern Energy (SWN), Gulfport Energy (GPOR), and Chesapeake Energy (CHK) rose 5.7%, 6.6%, 7.4%, and 10.3%, respectively, and outperformed their peers. Previous expectations of higher natural gas heating demand might have supported natural gas prices.

On October 11–16, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) rose ~3% and ~0.3%, respectively. These ETFs hold natural gas producer stocks.

Inventories rise

On October 18, the EIA is scheduled to release its natural gas inventory report for the week ending October 12. Any increase below ~65 Bcf (billion cubic feet) could cause the inventories to expand more into the negative territory, which could push natural gas prices higher.

However, Reuters analysts expected natural gas inventories to rise by 79 Bcf last week. If the EIA’s report is in line with analysts’ estimates, then the inventories spread would contract by ~30 basis points. As long as the inventories are at a double-digit deficit to their five-year average, natural gas’s undersupply concerns might increase for the upcoming winter season—a bullish factor for natural gas prices.

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