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Will dip in natural gas inventories cause prices to rally?

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Inventories decline less than expected

On January 22, the U.S. Energy Information Administration, or EIA, released its natural gas inventory report for the week ended January 16.

According to the report, stores dropped 216 billion cubic feet, or Bcf, to 2,637 Bcf. Analysts had been expecting a drop of 228 Bcf.

The net draw this week was 83 Bcf greater than last year’s net withdrawal for the same week. It was also 40 Bcf greater than the five-year average net withdrawal for the same week.

Inventories were 8.2% higher this year compared to the same period last year, and 5.5% lower compared to the five-year average (2010–2014).

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What caused the uptick in inventories?

The year 2014 was marked with abundant supply and an unusually warm December. Following 2013’s extreme cold weather, inventories fell ~1,000 Bcf below the five-year average in mid-April 2014. In fact, there was a 959 Bcf deficit to the average at the end of March 2014. But after a strong injection season, the deficit of natural gas inventories compared to the previous five-year average narrowed to 67 Bcf by the end of December.

The EIA forecasts that end-of-March 2015 inventories will total 1,665 Bcf, or 9 Bcf more than the five-year average.

Natural gas inventory movements affect prices. And, prices affect the margins of natural gas producers such as EOG Resources (EOG), Cabot Oil & Gas (COG), Devon Energy (DVN), and Encana Corp. (ECA). Most of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

As you can see, although natural gas inventories declined less than expected, the inventory draw was still relatively higher at 200 plus for the second week in a row. This could have a positive effect on natural gas prices. Having said that, the less-than-expected decrease in inventories could lessen the positive impact. Prices are also affected by the weather.

Weather key for natural prices

A milder December has depressed natural gas prices, which are already being pressured by over-supply thanks to increased shale drilling.

Unpredictably cold weather going forward could cause inventory draws, which would be of consequence to natural gas prices. The following part of this series looks at what impact the weather had on natural gas prices this week.

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