On Tuesday, natural gas September futures rose 1% and closed at $2.137 per MMBtu (million British thermal units). On Monday, the prices settled at the lowest level since May 26, 2016. Based on the mean closing prices, the prices have fallen 0.8% in July. Usually, prices trend higher in the third quarter, according to the seasonality since 2014. However, rising production and the bearish weather outlook might have dented the prices this quarter.
Natural gas production data
Last week, the natural gas rig count was at 169—a fall of five on a week-over-week basis. The oil rig count was also at more than a one-year low. In fact, the oil rig count will likely bottom out this month. Any rise in the oil rig count could increase the production. Since gas is often a by-product of US shale oil production, it’s important to monitor the oil rig count to understand natural gas supplies.
EIA inventory data
On Thursday, the EIA will report the inventories for the week ending July 26. Reuters analysts expect a rise of 55 Bcf (billion cubic feet). If the EIA report is in-line with analysts’ estimates, then the negative inventories spread will contract by 70 basis points—a concern for prices.
The inventories spread is the difference between inventories and their five-year average. However, any rise equal to or less than 34 Bcf would help expand the inventories spread. During this period of the year, inventories rose by 37 Bcf on average in the last five years.
Energy stocks and natural gas
In the week ending July 19, the inventories spread fell by 21 basis points. The EIA reported the inventories data on July 25. Between July 25 and July 30, natural gas active futures fell 4%. Natural gas–weighted stocks Cabot Oil and Gas (COG), EQT (EQT), and Southwestern Energy (SWN) returned -11.3%, -0.5%, and 0.9%, respectively. These natural gas–weighted stocks were the underperformers. The forecast for mild weather might be behind the fall despite bullish EIA inventory data. The weather forecast for the next two weeks suggests a similar trend. If the negative inventories spread contracts after the EIA data, then we might see more weakness in natural gas prices.
Based on natural gas’s implied volatility of 35.6%, the prices will likely close between $2.05 and $2.23 per MMBtu until August 6. There’s a 68% that the prices will be in this range—assuming that the prices are distributed normally.