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Natural gas inventories surpassed the 5-year average

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Inventories increase in line with analysts’ expectations

On February 19, the EIA (U.S. Energy Information Administration) released its natural gas inventory for the week ending February 13. According to the report, stocks dropped by 111 billion cubic feet, or Bcf, to 2,157 Bcf. Analysts were expecting a drop of 110 Bcf.

Changes in natural gas inventories affect natural gas prices. This affects natural gas producers’ margins like—QEP Resources (QEP), WPX Energy (WPX), Southwest Energy (SWN), and Encana Corp. (ECA). Most of these companies are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). They account for ~3.3% of the ETF.

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Stocks surpassed five-year average

After a net withdrawal of 111 Bcf last week, natural gas inventories as of February 13 were ~46% higher than the levels last year. They were ~3% higher than the five-year average. This is the first time since November 2013 that stocks surpassed the five-year average.

This week, the net withdrawal was 247 Bcf lower than the net withdrawal for the same week last year. The net withdrawal was 180 Bcf lower than the five-year average net withdrawal for the same week.

What led to the increasing inventories?

It’s important to note that 2014 was marked with abundant supplies and an unusually warm December. After the extreme cold weather in 2013, inventories fell ~1,000 Bcf below the five-year average in mid-April. However, after a strong injection season, by the end of December natural gas inventories’ deficit 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 the 2015 inventories at the end of March will total 1,699 Bcf—43 Bcf higher than the five-year average. This is almost double the deficit of ~837 Bcf seen in March last year.

Weather is key for natural gas prices

Compared to last winter, a milder winter this year depressed natural gas prices. The prices are already burdened with replenishing supplies, thanks to increased shale drilling.

However, unpredictable cold weather could cause huge inventory draws. This could impact natural gas prices. Nevertheless, the storage parity compared to the five-year average, and continued growth in production ensured that inventories are in a strong position to cope with any unforeseen increase in demand in the rest of the winter.

In the next part of this series, we’ll discuss what impact the weather had on natural gas prices last week.

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