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Why investors keep a close eye on natural gas inventories

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Natural gas inventories

The U.S. Energy Information Administration reports natural gas inventory figures every week. Natural gas is an important fuel worldwide. It’s used for everything from power generation to plastics.

Natural gas consumption in the U.S. is seasonal. It’s highest in the winter. Heating demands are at their highest during the winter months. Storage levels decline during these months. The summer months are usually considered to be the “injection season.” This is when producers restock natural gas storage levels.

NG inventories

Demand and inventories

Markets monitor inventory levels every week. The markets determine if inventory levels will be high enough before the winter season starts. Stronger demand could cause significant shortfalls in injections before the winter starts. This could strain available supplies.

While natural gas demand is high during winters, hot temperatures during summer months can also cause demand to increase. Power stations use more fuel to power cooling devices such as air conditioners.

Inventories and prices

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There are supply constraints because of rising demand, especially in the winters. This can push natural gas prices up. This is what happened last winter when heating demands were at their highest. Natural gas prices reached $6 million British thermal units, or MMBtu. However, they eased back to levels closer to $4 earlier this year.

Later in this series, we’ll discuss natural gas price movements last week.

Inventory expectations

If inventories rise more than expected, it implies either greater supply or weaker demand than expected. This is bearish for natural gas prices. However, if the increase in natural gas inventories is less than expected, it implies either weaker supply or greater demand than expected. This is bullish for natural gas prices.

Last week, analysts expected a 91 billion cubic feet (or Bcf) build-up in inventories. We’ll discuss actual inventory changes in the next part of the series.

Key stocks and ETF

Natural gas prices determine the margins for gas producers such as Devon Energy Corp (DVN), Chesapeake Energy Corporation (CHK), Range Resources Corp. (RRC), and Cabot Oil & Gas Corporation (COG). All of these companies are components of the Energy Select Sector SPDR ETF (XLE).

In the next part, read about the five- year average natural gas inventory.

 

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