Why Natural Gas Bulls Need to Stay Cautious

Inventories spread and natural gas prices

In the week ending January 4, the inventories spread was -15.1%. The inventories spread is the difference between natural gas inventories and their five-year average. During this period, the inventories spread contracted by two percentage points—compared to the previous week.

Why Natural Gas Bulls Need to Stay Cautious

On January 10, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending on January 4.

Natural gas inventories

The natural gas price is usually inversely related to the inventories spread. However, the relationship seems to be more biased toward a price downside when inventories rise above the five-year average. The market might be confident about having enough future supply instead of being concerned about demand getting out of hand.

Since January 10, the natural gas February futures have risen 17.9%. During the same period, natural gas–weighted stocks Southwestern Energy (SWN), Cabot Oil & Gas (COG), Chesapeake Energy (CHK), and Gulfport Energy (GPOR) rose 2.6%, 2.8%, 4.4%, and 6.9%, respectively, and outperformed their peers.

On January 10–15, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) returned 0.1% and -0.5%, respectively. These ETFs hold natural gas producer stocks.

Required fall in inventories

On January 17, the EIA is scheduled to release its natural gas inventory report for the week ending on January 11. Any fall by more than ~185 billion cubic feet could cause the inventories to expand into the negative territory. Reuters analysts expect a draw of 71 Bcf, which might not be a positive development for natural gas prices.