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Producers disappointed by latest natural gas inventory report

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Smaller-than-expected decline in inventories

On February 12, the US Energy Information Administration (or EIA) released its natural gas inventory for the week ended February 6. According to the report, stocks dropped by 160 billion cubic feet (or Bcf) to 2,268 Bcf. Analysts were expecting a drop of 168 Bcf.

A less-than-expected drop in natural gas inventories negatively affects natural gas prices, which in turn hurts the margins of natural gas producers such as EOG Resources (EOG), Devon Energy (DVN), Southwest Energy (SWN), and EQT (EQT). Most of these companies are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and make up ~4.4% of the ETF.

The net withdrawal this week was 74 Bcf lower than last year’s net withdrawal for the same week. The net withdrawal was 18 Bcf lower than the five-year average net withdrawal for the same week.

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Inventories were ~31.4% higher at this time compared to last year and 0.5% lower compared to the five-year average from 2010 to 2014. It’s interesting to note that inventories haven’t exceeded the five-year average since November 2013, according to the EIA. However, given the high production levels, the gap now seems to be closing.

Why are inventories higher compared to a year ago?

2014 was a year marked with abundant supplies and an unusually warm December. Following 2013’s extreme cold weather, inventories had fallen ~1,000 Bcf below the five-year average in mid-April. However, after a strong injection season, by the end of December, the deficit of natural gas inventories to the previous five-year average narrowed to 67 Bcf from a 959 Bcf deficit at the end of March 2014.

The EIA forecasts that end-of-March 2015 inventories will total 1,699 Bcf—43 Bcf higher than the five-year average. This is almost double the deficit of ~837 Bcf that we saw in March last year.

Weather is key for natural gas prices

A milder winter this year compared to last year has depressed natural gas prices—which are already burdened with replenishing supplies, thanks to increased shale drilling.

However, unpredictable cold weather could cause huge inventory draws, which would be of consequence to natural gas prices. Nevertheless, the storage parity versus the five-year average and continued growth in production have ensured that inventories are in a strong position to cope with any unforeseen increase in demand in the remaining winter.

The next part of this series discusses the impact that the weather had on natural gas prices last week.

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