Inventories spread and natural gas prices
In the week ending on December 7, the inventories spread was -19.9%. The inventories spread is the difference between natural gas inventories and their five-year average. During this period, the inventories spread expanded by 30 basis points compared to the previous week.
On December 13, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending on December 7.
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 13, the natural gas January futures have fallen 6.9%. 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), Range Resources (RRC), Chesapeake Energy (CHK), and Gulfport Energy (GPOR) fell 11.8%, 13.3%, 17.8%, and 19.1%, respectively, and underperformed their peers.
On December 13–18, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) fell ~10% and ~6.3%, respectively. These ETFs hold natural gas–producer stocks.
Inventories could fall more
On December 20, the EIA is scheduled to release its natural gas inventory report for the week ending on December 14. Any fall by more than ~115 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 131 Bcf in natural gas inventories for last week, which would expand the negative inventories spread by another 40 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.