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EIA’s Inventory Data and Natural Gas Prices

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Nov. 20 2020, Updated 11:42 a.m. ET

Inventories spread and natural gas prices

In the week ending on November 30, the inventories spread was -19.5%. The inventories spread is the difference between natural gas inventories and their five-year average. During this period, the inventories spread expanded by 40 basis points compared to the previous week.

On December 7, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending on November 30.

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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 December 7, the natural gas January futures have fallen 1.8%. In the past, a bearish weather forecast might have dragged natural gas prices, which we discussed in Part 1. During the same period, natural gas–weighted stocks Antero Resources (AR), Southwestern Energy (SWN), Range Resources (RRC), and Chesapeake Energy (CHK) fell 2.4%, 3.4%, 4.3%, and 5.5%, respectively, and underperformed their peers.

On December 7–11, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) fell ~3.4% and ~1.5%, respectively. These ETFs hold natural gas–producer stocks.

Inventories could fall more

On December 13, the EIA is scheduled to release its natural gas inventory report for the week ending on December 7. Any fall by more than ~64 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 74 Bcf in natural gas inventories for last week, which would expand the negative inventories spread by another 30 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 this winter—a bullish factor for natural gas prices.

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