Inventories decline more than expected
On March 12, the U.S. Energy Information Administration (or EIA) released its Weekly Natural Gas Storage Report for the week ended March 6. According to the report, stocks dropped by 198 billion cubic feet (or Bcf) to 1,512 Bcf. Analysts were expecting a drop of 191 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 Corporation (EQT). All these companies are components of the Vanguard Energy ETF (VDE) and make up ~2% of the fund.
Stocks fall below five-year average again
Following a net withdrawal of 198 Bcf, natural gas inventories as of March 6 were ~47% higher than last year’s levels and ~13% lower than the five-year average. Inventories briefly surpassed the five-year average three weeks prior.
The net withdrawal for the week ended March 6 week was higher than the 189 Bcf withdrawal last year for the same week. The net withdrawal was also higher than the five-year average net withdrawal of 116 Bcf for the same week.
Inventories this year vs inventories last year
The year 2014 was marked with abundant supplies and an unusually warm December. Following 2013’s extreme cold weather, inventories fell ~1,000 Bcf below the five-year average in mid-April. However, after a strong injection season and weak draws during early winter, inventories briefly surpassed the five-year average. Then they fell below the five-year average again with the recent bout of cold temperatures.
The EIA forecasts that inventories at the end of March 2015 will be 1,587 Bcf. That’s 730 Bcf higher than March 2014 inventories.
Weather is key for natural gas prices
A milder winter this year compared to last year has depressed natural gas prices. Prices are already burdened with replenishing supplies thanks to increased shale drilling.
Continued growth in production has therefore ensured a strong position for inventories.
In the next part of this series, we’ll talk about what impact the weather had recently on natural gas prices.