Natural gas inventories draw was less than expected, prices down slightly on the day
Interested in CHK? Don't miss the next report.
Receive e-mail alerts for new research on CHK
- 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 less than expected, meaning less natural gas was used than forecast. This was a negative indicator for natural gas and was reflected in prices as they declined on the day.
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 21, the EIA reported that natural gas inventories fell 62 bcf (billion cubic feet) for the week ended March 15, bringing current inventories to 1,876 bcf. A survey of experts expected the drop in inventories to be 70 bcf. This is a negative indicator for natural gas prices, because less natural gas was used than forecast. Additionally, it is notable that the five year average draw (or negative change in inventories) for this equivalent week was 26 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 ~$4.00/MMBtu prior to the inventory figure announcement at 10:30am ET, and dropped to ~$3.90/MMBtu (millions of British thermal units) in the minutes following. Natural gas closed at $3.94/MMBtu on the day compared to $3.96/MMBtu the day prior.
This was the first bearish report on inventories after three weeks of larger than expected draws. However, for several weeks in a row, natural gas inventories have been larger than normal and 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 less than consensus estimates resulting in a negative short-term indicator causing prices to drop on the day. However, natural gas inventory changes have been larger than normal for the past few weeks due to colder weather and this has caused natural gas prices to rally significantly from ~$3.15/MMBtu in mid-February to ~$4.00/MMBtu currently. 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.