Natural gas inventories represent the level of natural gas stored in various facilities around the US. The Energy Information Administration (EIA) reports inventory figures on a weekly basis. Many market participants monitor this data because it is informative of the supply and demand dynamics for natural gas. A larger than expected decrease, or “draw”, in inventories can reflect greater demand and/or less supply and is a positive for natural gas prices (and vice versa for a smaller than expected decrease). A larger than expected increase, or “build”, in inventories can reflect less demand and/or greater supply which is a negative for natural gas prices. Natural gas prices affect the earnings and valuation of domestic natural gas producers such as Chesapeake Energy (CHK), Quicksilver Resources (KWK), Southwestern Energy (SWN), and Range Resources (RRC).
On February 7, the EIA reported that natural gas inventories fell 118 bcf (billion cubic feet) for the week ended February 1, bringing current inventories to 2,684 bcf. A survey of experts had expected the drop in inventories to be 127 bcf. This is a slightly negative indicator for natural gas prices, because less natural gas was used than had been forecast. Withdrawals since November 1 (the start of the winter heating season) totaled 1,245 bcf, or 4.4% below the five-year average of 1,302 bcf, which is also a negative for natural gas prices.
The reported draw on inventories was has been bearish for the past few weeks. Additionally, inventories remain at close to historic highs for this point in the year, as seen in the above graph. Natural gas fell sharply on the day, as it closed Wednesday at $3.42/MMBtu (millions of British thermal units) and closed Thursday (the day of the inventory report) at $3.29/MMBtu. The sharpest drop came at 10:30am when the inventory figure was released.
This week’s natural gas inventory draw was less than consensus estimates, and draws for the season have been below the five year average, both of which are fundamental negatives for natural gas. Investors who are long natural gas through an ETF such as the US Natural Gas Fund (UNG) or natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), and EXCO Resources (XCO) should monitor inventory draws and builds as they are significant data points in the national supply/demand picture of natural gas. The supply and demand dynamics of the commodity affect the price, and therefore the margins of companies which produce natural gas.