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Bearish natural gas inventories push prices down

The 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 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 or less supply (or both) 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 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).

2013.07.31 - Gas InventoriesEnlarge Graph

Reported inventories exceeded expectations

On August 1, the EIA reported that natural gas inventories increased 59 bcf (billion cubic feet) for the week ended July 26, bringing current inventories to 2,879 bcf. A survey of experts estimated the build in inventories to be 55 bcf. This is a negative indicator for natural gas prices, as it implies less than expected gas demand, greater than expected gas supply, or both. Given the bearish (negative) inventory figures, natural gas prices dipped, closing at $3.39 per MMBtu (millions of British thermal units) compared to the prior day’s close of $3.45 per MMBtu. Natural gas prices have declined sharply from two weeks ago, when they were at $3.81 per MMBtu, as milder weather has set in. For more on how weather affects natural gas prices, please see Why milder temperatures dragged down natural gas prices.

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

Investors who are long (that is, who own shares in) natural gas through an ETF (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 because they’re significant data points in the national supply and demand picture of natural gas. The supply and demand dynamics of the commodity affect its price and therefore also the margins of companies that produce natural gas.

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