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Larger than expected increase in nat gas inventories cause prices to slide

2013.07.01 - US Nat 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 more than expected, meaning less natural gas was used than forecast, more natural gas was supplied than forecast, or both. Natural gas prices closed down significantly on the day at $3.58/MMBtu, compared to the prior day’s close of $3.71/MMBtu.
  • Natural gas is at its lowest point since March 2013, as inventory figures have been bearish over the past several weeks causing prices to sink.

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 June 27, the EIA reported that natural gas inventories increased 95 bcf (billion cubic feet) for the week ended June 21, bringing current inventories to 2,533 bcf. A survey of experts had expected the build in inventories to be 90 bcf. This is a negative indicator for natural gas prices, because less natural gas was used than had been forecast or more natural gas was supplied than had been forecast (or both). Natural gas prices closed at $3.58/MMBtu compared to the prior day’s close of $3.71/MMBtu.

Natural gas prices have dropped lower over the past several weeks, as reported inventory figures builds have been greater than expectations. Natural gas had been trading as high as ~$4.20/MMBtu in May, but at current levels natural gas is trading at its lowest levels since March 2013. To read about last week’s inventory figures see “Why the build in natural gas inventories depresses prices“.

This week’s natural gas inventory build was more than consensus estimates, resulting in a negative short-term catalyst. 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.

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