Every week, the Energy Information Administration (EIA) releases data on how much natural gas is stored in various facilities across the US. These figures, also called “natural gas inventories”, can affect US natural gas prices and therefore the valuation of producers of natural gas.
On January 10, the EIA reported that natural gas inventories fell 201 bcf (billion cubic feet) for the week ended January 4, bringing current inventories to 3,404 bcf. A survey of economists had expected the drop in inventories to be 191 bcf. This is a positive indicator for natural gas prices, because more natural gas was used than had been forecast. Also, the five year average draw (or negative change in inventories) for this equivalent week was 132 bcf. It is a positive for natural gas prices that this week’s draw on inventories is greater than normal. A possible reason that this week’s draw was so large is that parts of the country experienced colder than normal weather and natural gas is one of the primary fuels used for home heating. Additionally, increased industrial production could also have contributed to last week’s large draw, as natural gas is a major fuel used for the manufacturing sector.
For the past two weeks, natural gas inventory draws have been higher than economist estimates and also higher than the five year average draws. However, since the beginning of November (roughly the start of the heating season), inventories have declined only ~600 bcf compared to ~700 bcf for the five year average. This could have occurred due to a warmer than normal December last year and also because current natural gas production is greater than the average over the past five years. Additionally, inventories remain at historical highs for this point in the year. As seen in the top graph, current natural gas inventories are close to the highest point they have been over the past five years.
So, while inventories are close to historic highs and natural gas prices are not far from historic lows, recent large inventory draws are positive indicators for natural gas prices in the short term. Generally speaking, higher domestic natural gas prices bode well for energy companies which have a significant amount of production and assets focused on the commodity as higher prices result in stronger margins. Such companies include Chesapeake Energy (CHK), Range Resources (RRC), and Southwestern Energy (SWN). Additionally, changes in natural gas prices affect the US Natural Gas Fund (UNG), an ETF designed to track changes in natural gas prices.