Why natural gas inventories caused natural gas prices to fall
Natural gas inventories increased more than expected
On July 17, 2014, the U.S. Energy Information Administration (or EIA) reported that natural gas inventories increased by 107 billion cubic feet for the week ending July 11, 2014, bringing current inventories to 2,129 billion cubic feet. A survey of experts had estimated the increase in inventories to be 99 billion cubic feet.
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While the demand for natural gas for cooling purposes was lower because of cooler temperatures in the Midwest and Northwest, the supply of gas has been strong because of the U.S. shale boom.
As a result of the higher inventory number, natural gas prices traded lower on closing day at $3.95 per million British thermal units, compared to $4.12 per million British thermal units the previous day. This is the lowest it has been since late November of last year.
Investors with natural gas exchange-traded funds (or ETFs), such as the U.S. Natural Gas Fund (UNG), or natural gas producers such as Chesapeake Energy Corporation (CHK), Devon Energy Corporation (DVN), Range Resources Corporation (RRC), and Quicksilver Resources Inc. (KWK) should monitor inventory draws and builds because these are important data points in the national supply and demand of natural gas. The supply and demand dynamics of natural gas affect its price and, in turn, the margins of companies that produce natural gas. The recent spate of larger than expected increases in natural gas inventories could be considered negative for these companies.
Background: Natural gas inventory is far lower than average
Current natural gas inventory is roughly 25% lower than the average of the past five years because last winter brought extreme cold weather. Natural gas demand surged, which resulted in inventories decreasing greatly and prices increasing. The front-month natural gas futures contract traded around $3.50 per million British thermal units in early November and peaked above $6 per million British thermal units at points in February.
The markets will be watching to see how natural gas inventories move through the summer ahead of the peak winter demand. Inventory levels that remain below average could prime natural gas prices for a rally this coming winter.