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Natural gas inventories down but far from out

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Natural gas inventories

On February 26, the U.S. Energy Information Administration, or EIA, released its natural gas inventory for the week ended February 20. According to the report, stocks dropped by 219 Bcf (billion cubic feet) to 1,938 Bcf. Analysts were expecting a drop of 239 Bcf.

Changes in natural gas inventories affect natural gas prices, which in turn affect the margins of natural gas producers such as EOG Resources (EOG), Devon Energy (DVN), Southwest Energy (SWN), and EQT Corp. (EQT). Those companies that are components of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) make up ~4.4% of the ETF.

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Stocks fall below the five-year average again   

Following a net withdrawal of 219 Bcf last week, natural gas inventories, as of February 20, were ~42% higher than last year’s levels and ~1.5% lower than the five-year average. In the previous week, inventories surpassed the five-year average for the first time since November 2013. Meanwhile, they’re still quite close to that average, as you saw in the Part 1 graph.

The net withdrawal this week was 102 Bcf higher than last year’s net withdrawal for the same week. The net withdrawal was 88 Bcf higher than the five-year average net withdrawal for the same week.

What has led to the rising inventories?

Last year, 2014, was characterized by abundant supply and an unusually warm December. Following 2013’s extreme cold weather that lasted into 2014, inventories fell to ~1,000 Bcf, below the five-year average in mid-April of 2014. More precisely, there was a 959-Bcf deficit of inventory to the previous five-year average at the end of March 2014. Nevertheless, after a strong injection season, the deficit of natural gas inventories to the previous five-year average narrowed to 67 Bcf by the end of December.

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 has depressed natural gas prices, which are already pressured by an abundance of supply, thanks to increased shale drilling.

Unpredictably cold weather could still cause huge inventory draws, which would be of consequence to natural gas prices. However, the storage levels vis-à-vis the five-year average, coupled with continued production growth, ensures that inventories are in a strong position to cope with any unforeseen increase in demand during what remains of the winter.

The next part of this series looks at how the weather affected natural gas prices last week.

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