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 February 28, the EIA reported that natural gas inventories fell 171 bcf (billion cubic feet) for the week ended February 22 bringing current inventories to 2,299 bcf. A survey of experts had expected the drop in inventories to be 170 bcf. This is a slightly positive indicator for natural gas prices because more natural gas was used than had been forecast; however the difference between the actual figure and estimated figure was small. Also, the five year average draw (or negative change in inventories) for this equivalent week was 118 bcf. It is a positive for natural gas prices that this week’s draw on inventories is less than normal.
The reported draw on inventories was slightly bullish this past week and the prior week. However for the several weeks prior to that, natural gas inventory draws have been lower than experts’ estimates. Inventories still remain at close to five year highs for this point in the year, as seen in the above graph, however since the beginning of this year natural gas storage has been trending more towards the five year average.
Natural gas prices bounced when the inventory figures were announced at 10:30am Thursday morning. The commodity closed up on the day at $3.49/MMBtu (millions of British thermal units) compared to $3.43/MMBtu for the prior day’s close.
This week’s natural gas inventory draw was slightly more than consensus estimates, resulting in a short-term positive catalyst. However, draws for the season have been below the five year average with one factor possibly being a warmer than normal winter (see article titled “Warm winter continues to put pressure on nat gas names”). 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.