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The basic market principles of natural gas inventory

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Mar. 4 2015, Published 2:24 p.m. ET

Natural gas inventories

The U.S. Energy Information Administration, or EIA, reports natural gas inventory figures every week. Natural gas is an important fuel worldwide with uses spanning power generation to plastics.

Natural gas consumption in the US is highly seasonal. Consumption is greatest in the winter when heating demands are at their highest, since about half of American households use natural gas for heating. Storage levels decline during these months. Producers restock natural gas inventories between April 1 and October 31, a period also called the “injection season.”

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Demand and inventories

Markets monitor inventory levels every week. This is done to determine if inventory will be sufficient for the winter. If winter demand is strong, the quantity of natural gas available in storage could come under strain.

While natural gas demand is highest during winter, hot temperatures during the summer can also cause demand to increase. Power stations use more fuel to power cooling devices like air conditioners. This sometimes reduces storage buildup during injection season.

Inventories and prices

Natural gas inventory levels have a direct bearing on natural gas prices, which in turn affect the profitability of natural gas producers such as WPX Energy (WPX), Chesapeake Energy (CHK), Encana (ECA), and Cabot Oil & Gas (COG). CHK and COG combined make up ~2.4% of the Energy Select Sector SPDR ETF (XLE).

When there are supply constraints because of strong heating demand, particularly during winter, natural gas prices can spike. This is what happened last winter when heating demand was at its highest. Natural gas prices reached $6 per MMBtu (million British thermal units).

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

Inventory expectations

If the decline in inventories exceeds expectations, it implies either lower supply or stronger demand than expected. This is bullish for natural gas prices. However, if the decrease in natural gas inventories is less than expected, it implies either stronger supply or lower demand than expected. This is bearish for natural gas prices.

Analysts had expected an inventory draw of 239 Bcf (billion cubic feet) last week. We’ll discuss actual inventory changes in the following parts of the series.

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