Inventories spread and natural gas prices

In the week ending on November 23, the inventories spread was -19.1%. The inventories spread is the difference between natural gas inventories and their five-year average. During this period, the inventories spread expanded by 50 basis points compared to the previous week.

Analyzing Natural Gas Inventory Levels

On November 29, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending on November 23.

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 November 29, natural gas January futures have fallen 4.1%. In the past, a milder weather forecast might have dragged natural gas prices. During the same period, natural gas–weighted stocks Range Resources (RRC), Chesapeake Energy (CHK), Antero Resources (AR), and Southwestern Energy (SWN) have fallen 1.8%, 4.6%, 5.9%, and 8.3%, respectively, and underperformed their peers.

On November 29–December 4, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) fell ~1.7% and ~0.9%, respectively. These ETFs hold natural gas–producer stocks.

Inventories could fall more

On December 7, the EIA is scheduled to release its natural gas inventory report for the week ending on November 30. Any fall by more than ~47 Bcf (billion cubic feet) could cause the inventories to expand more into the negative territory, which could be a positive development for natural gas prices. Reuters analysts expect a draw of 73 Bcf in natural gas inventories for last week, which would expand the negative inventories spread by another 60 basis points.

As long as inventories are at a double-digit deficit to their five-year average in percentage terms, natural gas’s undersupply concerns could increase for this winter season—a bullish factor for natural gas prices.

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