Natural gas inventories spread
In the week ending July 12, the natural gas inventories spread was -5.3%. During this period, the negative inventories spread contracted by 10 basis points compared to the previous week. On July 18, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending July 12. The inventories spread is the difference between natural gas inventories and their five-year average. We’ll analyze natural gas prices based on the EIA’s inventory data.
Inventories and natural gas prices
Over the last ten years, natural gas prices fell whenever natural gas inventories were higher than their five-year average. Between November 2013 and April 2014, when inventory levels fell short of the five-year average by the highest amount in the past ten years, natural gas prices rose as high as $6.14 per MMBtu (British thermal units in millions).
Since July 18, the natural gas September futures have risen 0.5%. During the same period, natural gas–weighted stocks Antero Resources (AR), Chesapeake Energy (CHK), and Range Resources (RRC) rose 5.7%, 6.3%, and 6.6%, respectively, and outperformed their peers. Except for Cabot Oil and Gas (COG), the remaining natural gas–weighted stocks outperformed gas prices. Oil prices have been stronger this week. US crude oil prices have risen 2.7% since July 18. Antero Resources, Chesapeake Energy, and Range Resources operate with a production mix of approximately 71%, 69%, and 69% in natural gas.
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.
Required change in inventories
On Thursday, the EIA is scheduled to release its natural gas inventory report for the week ending July 19. Any rise less than ~42 Bcf (billion cubic feet) could cause the inventories spread to expand more into the negative territory—a positive development for natural gas prices. Reuters analysts expect an addition of 34 Bcf. If the EIA data is in line with analysts’ estimates, then the inventories spread would contract by 30 basis points. The five-year mean injection for this time of the year is 44 Bcf. During this period last year, natural gas inventories rose by 28 Bcf.