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 from power generation to plastics.
Natural gas consumption in the United States is very seasonal. Consumption is highest in the winter when heating demands are at their highest. About half of American households use natural gas for heating. Storage levels decline during these months. Producers restock natural gas storage between April 1 and October 31, which is 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 such as air conditioners. This sometimes reduces storage buildup during the injection season.
Inventories and prices
Inventory levels have a direct bearing on natural gas prices. In turn, natural gas prices affect the profitability of natural gas producers such as Devon Energy (DVN), Chesapeake Energy (CHK), Encana Corporation (ECA), and EQT Corporation (EQT). All these companies are components of the iShares Global Energy ETF (IXC) and make up ~2% of the fund.
When there are supply constraints because of strong heating demand, particularly during winter, natural gas prices can spike. This is what happened in the winter of 2013 when heating demand was at its highest. Natural gas prices touched $6 per MMBtu (million British thermal units).
Later in this series, we’ll take a look at 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 expected a natural gas inventory draw of 51 billion cubic feet (or Bcf) last week. We’ll look at the actual inventory changes in the following parts of the series.