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 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, the available natural gas in storage could be strained.
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 can reduce storage build-up 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), Southwest Energy (SWN), Encana (ECA), and EQT (EQT). SWN and EQT are components of the Energy Select Sector SPDR ETF (XLE) and they make up ~1.5% 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 in the winter of 2013, when heating demand was 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.
Given that the heating season is coming to an end and natural gas injection season is about to begin, if inventories rose more than expected, the rise would imply either greater supply or weaker demand than expected. This would be bearish for natural gas prices.
However, if the increase in natural gas inventories were less-than-expected, this would imply either weaker supply or greater demand than expected. This would be bullish for natural gas prices.
Analysts had expected an inventory build of 6 cubic feet (or Bcf) last week. We’ll discuss actual inventory changes in this series.