Natural gas inventories
The US Energy Information Administration (or EIA) reports natural gas inventory figures every week. Natural gas is an important fuel worldwide with uses spanning from power generation to plastics.
Natural gas consumption in the US is very seasonal. Consumption is highest in the winter, when heating demand is highest, as about half of US households use natural gas for heating. Storage levels decline during these months. Producers restock their natural gas storage between April 1 and October 31, which is also called the “injection season.”
Demand and inventories
Markets monitor inventory levels every week to determine if inventory levels will be high enough for the winter. If winter demand is strong, available natural gas in storage could come under strain.
While natural gas demand is high during the 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 trend sometimes reduces storage build-ups during injection season.
Inventories and prices
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 EQT (EQT). WPX, CHK, and ECA are components of the Vanguard Energy ETF (VDE), and they make up ~1.3% of the ETF.
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 touched $6 per MMBtu (million British thermal units).
Later in this series, we’ll discuss natural gas price movements last week.
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 224 billion cubic feet (or Bcf) last week. We’ll discuss actual inventory changes in the following parts of the series.