Inventories decline more than expected
On March 5, the US Energy Information Administration (or EIA) released its natural gas inventory for the week ended February 27. According to the report, stocks dropped by 228 billion cubic feet (or Bcf) to 1,710 Bcf. Analysts were expecting a drop of 224 Bcf.
Changes in natural gas inventories affect natural gas prices, which in turn affect the margins of natural gas producers such as QEP Resources (QEP), Range Resources (RRC), Chesapeake Energy (CHK), and EQT (EQT). All these companies are components of the Vanguard Energy ETF (VDE), and they make up ~2% of the ETF.
Stocks fall further below the five-year average again
Following a net withdrawal of 228 Bcf last week, natural gas inventories as of February 27 were 40% higher than last year’s levels, and ~8% lower than the five-year average. Inventories had surpassed the five-year average for the first time since November 2013, a couple of weeks back. Inventories are still quite close to the five-year average, as the graph in Part 1 of this series shows.
The net withdrawal this week was higher than the 144 Bcf withdrawal last year for the same week. The net withdrawal was also higher than the five-year average net withdrawal of 115 Bcf for the same week.
What led to these rising inventories?
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.
Weather is key for natural gas prices
A milder winter this year compared to last 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 consequential to natural gas prices. Nevertheless, the storage levels compared to 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 remainder of winter. The next part of the series discusses the impact that the weather had on natural gas prices last week.