Bullish natural gas inventory figure caused intraday price pop

2013.03.28 - Natural 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 greater than expected, meaning greater natural gas was used than forecast. This was a positive indicator for natural gas and the commodity experienced a brief intraday pop, however, prices declined on the day due to expectations of warmer weather to come.

Every week, the Energy Information Administration (EIA) releases data on how much natural gas is stored in various facilities across the U.S. These figures, also called “natural gas inventories,” can affect U.S. 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 28th, the EIA reported that natural gas inventories fell 95 bcf (billion cubic feet) for the week ended March 22nd, bringing current inventories to 1,781 bcf. A survey of experts expected the drop in inventories to be 90 bcf. This is a positive indicator for natural gas prices, because more natural gas was used than had been forecast. Additionally, it is notable that the five year average draw (or negative change in inventories) for this equivalent week was -6 bcf (that is, at this point of the year the five year average was actually an inventory build of 6 bcf), and the inventory draw was likely higher than normal due to unseasonably cold weather. However, the market had likely priced in colder weather into natural gas prices already.

Natural gas prices were trading around ~$4.05/MMBtu prior to the inventory figure announcement at 10:30am ET, and spiked to ~$4.11/MMBtu (millions of British thermal units) in the minutes following. However, natural gas closed at $4.02/MMBtu compared to the prior day’s close of $4.07/MMBtu. According to news sources, the National Weather Service released an update to its Global Forecast system model midday which indicated normal or warmer-than-normal weather in most of the continental U.S. in mid-April, and this may have caused natural gas to trade down.

This week’s natural gas inventory draw was more than consensus estimates, and also more than normal, resulting in a positive short-term indicator. This is the fifth week in a row that the natural gas inventory draw has been greater than the five year average. The large inventory draws have provided support to natural gas prices, which have rallied from mid-February lows of ~$3.15/MMBtu to trade currently at ~$4.00/MMBtu. Investors who are long on 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.