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Why the slight move up in natural gas inventories was positive for stocks

2013.07.07 - Nat gas inventoriesEnlarge GraphMarket participants watch the change in the amount of natural gas inventories to gauge supply and demand dynamics

Every week, the Energy Information Administration (EIA) releases data on how much natural gas is stored in facilities across the United States. 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).

Last week’s build in natural gas inventories was less than expected, meaning more natural gas was used than forecast, less natural gas was supplied than forecast, or both

On July 3, the EIA reported that natural gas inventories increased 72 bcf (billion cubic feet) for the week ended June 28, bringing current inventories to 2,605 bcf. A survey revealed that experts had expected the build in inventories to be 74 bcf. This is a positive indicator for natural gas prices, because more natural gas was used than had been forecast or less natural gas was supplied than had been forecast (or both). Natural gas prices closed at $3.69 pet MMBtu (million British thermal unit) compared to the prior day’s close of $3.65 per MMBtu.

Natural gas is close to its point since March 2013, as inventory figures had been bearish (negative) over the past several weeks (excluding this week), causing prices to sink

This week’s natural gas inventory build was less than consensus estimates, resulting in a positive short-term catalyst. Investors who are long natural gas through an exchange-traded fund such as the U.S. 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’re significant data points in the national supply and demand picture of natural gas. The supply and demand dynamics of the commodity affect the price and therefore the margins of companies that produce natural gas.