EIA inventory data showed a buildup of 104 Bcf (billion cubic feet) in natural gas inventories. The EIA reported the natural gas inventory on October 17. The rise in the government data was 3 Bcf below the Reuters Poll.
However, the inventories spread turned positive for the first time since September 29, 2017. For the week ended October 11, the inventories spread—or the difference between natural gas inventories and their five-year average—was 0.4%.
A rising inventories spread could indicate weaker natural gas prices ahead. The EIA already forecast a warmer winter. According to Reuters, this week’s natural gas inventories are expected to rise by 94 Bcf.
If the EIA reports the same rise on October 24, then the inventories spread would expand to 1%. A rise of 60 basis points in the inventories spread on a week-over-week basis could subdue natural gas prices.
Weather forecast and EIA production data
Reuters supply-and-demand data suggests bullishness for natural gas prices. On October 16, dry natural gas production was at 93.6 Bcf, which was 0.6 Bcf per day above its 30-day moving average. On October 17, total flows of feedgas for LNG liquefaction rose by 0.8 Bcf per day over the previous day.
Moreover, the Reuters weather model suggests a rise of 6.6–7.6 HDD (heating degree days) from the earlier forecast. The time horizon for this weather forecast is the next 15 days. On October 17, natural gas active futures gained 0.4% and settled at $2.312 per MMBtu (million British thermal units). Bullish weather might have supported gas prices on the same day.
Chesapeake Energy (CHK) fell 1.6% in the last trading session. CHK operates with a majority of its production mix in natural gas. The United States Natural Gas Fund LP (UNG) rose 0.2% on the same day.
Natural gas marketed production was 106.3 Bcf per day between October 10 and 16. On a year-over-year basis, it grew by 8.4% despite a fall of 25.9% in the natural gas rig count. The rise in US shale oil production could explain this trend.
On October 17, natural gas prices were 1.9%, 1.3%, 0.8%, and 9.3%, respectively, below their 20-, 50-, 100-, and 200-day moving averages. Since September 30, in almost all instances, natural gas prices were below these key moving averages.
On October 15, natural gas prices closed above their 50- and 100-day moving averages. However, bearishness around the EIA data might have pushed prices below these moving averages on the next day.
Coincidentally, US crude oil prices have a similar trend with these moving averages. The sentiments around oil prices might have impacted natural gas prices. This month, the correlation between WTI crude oil prices and natural gas stood at -34.3%. In 2019, this correlation is 13.2%.
On October 17, natural gas’s implied volatility was 51.1%. This implied volatility suggests a price range of $2.18–$2.46 per MMBtu for natural gas until October 24. The model takes a confidence level of 68%. The price range depends on the normal distribution of prices. This week, natural gas prices were in the range of last week’s price forecast.
The EIA inventory data will play an important role in next week’s gas prices. Based on our earlier discussion, natural gas prices might not see large changes.