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Lower Natural Gas Inventory Might Propel Prices

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Nov. 20 2020, Updated 4:42 p.m. ET

Required fall in inventories

On March 21, the EIA (U.S. Energy Information Administration) is scheduled to release its natural gas inventory report for the week ending March 15. Any fall by more than ~38 Bcf (billion cubic feet) could cause the inventories spread to expand more into the negative territory. Reuters analysts expect a larger draw of 52 Bcf, which would expand the negative inventories spread by 80 basis points. The inventories spread is the difference between natural gas inventories and their five-year average.

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Inventories spread and natural gas prices

In the week ending March 8, the inventories spread was -32.4%. During this period, the inventories spread expanded by ~7.4 percentage points—compared to the previous week. On March 14, the EIA reported the natural gas inventory data for the week ending March 8.

Natural gas inventories spread and stocks

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 March 14, the natural gas April futures have risen 0.7%. During the same period, natural gas–weighted stocks Chesapeake Energy (CHK), EQT (EQT), and Cabot Oil & Gas (COG) returned 1.9%, 1%, and -0.3%, respectively, and outperformed their peers. Natural gas prices are important for these upstream stocks. The large expansion in the inventories spread might support natural gas prices.

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