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Natural gas continues to rally on better than expected inventory figures

2013.04.19 - 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 build in natural gas inventories was less than expected, meaning greater natural gas was used than forecast or less natural gas was supplied than forecast. Additionally, the inventory build was less than normal for this time of year. These were both positive indicators for natural gas and natural gas closed the day at $4.40/MMBtu, $0.19 higher than the prior day’s close.

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 April 18, the EIA reported that natural gas inventories increased 31 bcf (billion cubic feet) for the week ended April 12, bringing current inventories to 1,704 bcf. A survey of experts had expected the build in inventories to be 38 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 build for this equivalent week was 39 bcf (that is at this point of the year. Natural gas closed the day at $4.40/MMBtu compared to the prior day’s close of $4.21/MMBtu.

This week’s natural gas inventory build was less than consensus estimates and also less than normal. This is the eighth week in a row that natural gas inventories have increased by less or decreased by more than the five year average, resulting in a positive medium-term catalyst. 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 ~$4.40/MMBtu. 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.