On September 12, natural gas prices rose 0.9% and settled at $2.574 per MMBtu (million British thermal units). On the same day, the EIA (US Energy Information Administration) reported its natural gas inventory figures for the week that ended on September 6.
A Reuters poll suggested a rise of 82 Bcf (billion cubic feet) in natural gas inventories. However, the EIA reported a rise of 78 Bcf. With this rise, the negative natural gas inventories spread contracted by 22 basis points, a negative development for natural gas prices. For the inventories spread to expand, the EIA would have had to report a rise of less than 72 Bcf. Usually, natural gas prices are inversely related to the inventories spread.
Inventories spread and prices
For the week that ended on August 30, natural gas inventories rose by 84 Bcf. With this rise, the negative inventories spread contracted by 70 basis points. The EIA reported its natural gas inventory data on September 5. Between September 5 and September 11, natural gas prices rose 4.8%.
Moreover, natural gas–weighted stocks Gulfport Energy (GPOR), Chesapeake Energy (CHK), and Southwestern Energy (SWN) gained 13.5%, 14.4%, and 19%, respectively, and outperformed their peers. Their peers include natural gas–weighted stocks that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and operate with production mixes of at least 60% in natural gas. GPOR, CHK, and SWN operate with production mixes of 90.4%, 69%, 79.6%, respectively, in natural gas.
Last week’s weather forecast might have limited the inventories spread’s impact on natural gas prices. However, based on Refinitiv data on September 13, the weather model suggests a fall in the number of cooling degree days for the next two weeks compared to earlier estimates. The weather forecast model suggests a fall in demand of between 1.3 Bcf and 8.1 Bcf per day for the next two weeks in the US.
Between September 13 and September 19, natural gas active futures are expected to close between $2.69 and $2.46 per MMBtu based on natural gas’s implied volatility of 38.6%. The probability for this price range is 68%. The model assumes that prices are normally distributed. As we discussed earlier, the demand figure could drag natural gas prices below the $2.5 level next week.
According to the EIA’s Short-Term Energy Outlook Report, which it released on September 10, it expects spot Henry Hub natural gas prices to average $2.55 per MMBtu in 2020. This amount is 7.4% lower than its earlier forecast. The EIA lowered its expectations for natural gas prices on account of production outpacing demand.
In the week that ended on September 6, the natural gas rig count fell by two to 160, its lowest level since March 31, 2017. However, the oil rig count plays an important role in natural gas production. The count could explain the surge of around 67% in natural gas–marketed production since 2008. In this period, the oil rig count rose 33.5%, while the natural gas rig count fell 90%. The surge in production led to a decline of 67.1% in natural gas prices. Natural gas is often a by-product of US shale oil production.
In the same week, the oil rig count fell by four to 738, its lowest level since November 11, 2017. However, based on the relationship between the oil rig count and crude oil prices, the oil rig count could start rising in the remaining months of 2019.
According to the EIA’s Drilling Productivity Report released on August 12, natural gas production from major seven shale regions could rise 729 million cubic feet per day in September on a month-over-month basis. On a year-over-year basis, this month production could rise around 13.1%. In this way, production data could adversely affect any bullish inventories data.