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Natural gas demand last week was far above normal, provides price support

2013.04.04 - US 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. Additionally, the inventory draw was far greater than normal for this time of year. These were both positive indicators for natural gas and natural gas closed the day at $3.95/MMBtu, $0.05 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 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 April 4th, the EIA reported that natural gas inventories fell 94 bcf (billion cubic feet) for the week ended March 29th, bringing current inventories to 1,687 bcf. A survey of experts expected the drop in inventories to be 91 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 -4 bcf (that is at this point of the year, the five year average was actually an inventory build of 4 bcf), and the inventory draw was likely higher than normal due to unseasonably cold weather. Natural gas closed the day at $3.95/MMBtu compared to the prior day’s close of $3.90/MMBtu.

This week’s natural gas inventory draw was more than consensus estimates and also far more than normal. This is the sixth week in a row that the natural gas inventory draw has been greater 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 ~$3.90/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.

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