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Why natural gas prices remain depressed, with no help from storage report

2013.07.12 - Nat Gas InventoriesEnlarge GraphThe weekly natural gas storage report affects natural gas prices

Every week, the Energy Information Administration (EIA) releases data on how much natural gas is stored in various facilities across the United States. These figures, also called “natural gas inventories,” can affect U.S. natural gas prices and therefore the valuation of natural gas producers. 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).

Reported inventories were in line with expectations

On July 11, the EIA reported that natural gas inventories increased 82 bcf (billion cubic feet) for the week ended July 5, bringing current inventories to 2,687 bcf. A survey of experts accurately predicted the build in inventories to be 82 bcf. This is a neutral indicator for natural gas prices, as the balance of natural gas supply and demand was in line with expectations. Natural gas prices closed at $3.61/MMBtu (million British thermal units) compared to the prior day’s close of $3.66/MMBtu.

This week’s natural gas inventory build was the same as consensus estimates, resulting in a neutral short-term catalyst

Investors who are long (that is, own shares in) natural gas through an exchange-traded fund (ETF) 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, which means they also affect the margins of companies that produce natural gas.