Why oil and natural gas prices turned around a bearish spell

Part 2
Why oil and natural gas prices turned around a bearish spell (Part 2 of 2)

Why natural gas prices shrugged off inventory dynamics and rose

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 natural gas producers. 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).

2014.01.21 - US Natural Gas InventoriesEnlarge Graph

Reported inventory draw was slightly lower than expected

On January 16, 2014, the EIA reported that natural gas inventories decreased 287 bcf (billions of cubic feet) for the week ended January 10, bringing current inventories to 2,530 bcf. A survey of experts estimated the draw in inventories to be 300 bcf. This lower-than-expected draw in natural gas inventories signals that demand was less than expected or supply was more than expected, which are bearish signals for natural gas prices. However, despite the inventory data, natural gas prices rose from $4.33 per MMBtu to $4.38 per MMBtu on cold weather expectations. To see why weather affects natural gas prices, see Why this colder-than-average winter has helped natural gas prices.

This week’s gas inventories drop was greater than expectations, but prices rose on cold weather prices

Investors who are long (that is, who own shares in) natural gas through an 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 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. This week’s draw in inventories data was smaller than analysts expected, which can be treated as a negative indicator for natural gas prices. However, markets traded lower on expectations of decreased demand from future milder weather.

To see why natural gas is gaining popularity among power generators, see this Market Realist series.

The Realist Discussions