Another large inventory draw boosts natural gas prices to highest point since Nov 2012

2013.03.13 - Nat Gas InventoriesEnlarge Graph

  • Market participants watch the change in the amount of natural gas inventories to gauge supply and demand dynamics, with large inventory builds representing weak demand/strong supply and large inventory draws representing strong demand/weak supply, generally speaking.
  • Last week’s draw in natural gas inventories was significantly larger than expected, meaning more natural gas was used than forecast. This was a positive indicator for natural gas and prices advanced on the day.

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. 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 March 14, the EIA reported that natural gas inventories fell 145 bcf (billion cubic feet) for the week ended March 8, bringing current inventories to 1,938 bcf. A survey of experts had expected the drop in inventories to be 137 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 74 bcf. It is a positive for natural gas prices that this week’s draw on inventories is more than normal.

Natural gas prices bounced almost $0.06/MMBtu (millions of British thermal units) when the inventory figures were announced at 10:30am Thursday morning. Natural gas closed at $3.81/MMBtu on the day compared to $3.68/MMBtu the day prior.

The reported draw on inventories was bullish for the third week in a row. As seen in the top graph, natural gas inventories have been trending towards the average and away from the five-year high, which is a positive indicator.

This week’s natural gas inventory draw was more than consensus estimates resulting in a positive short-term indicator. Additionally, several weeks of larger than expected inventory draws have caused natural gas prices to rally significantly from ~$3.15/MMBtu in mid-February to ~$3.80/MMBtu currently. 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 Quicksilver Resources (KWK) 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.