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Natural Gas Injection Starts Before Heating Season Ends

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Inventories increase

The last time inventories increased before heating season ended was in March 2012. On March 25, the US Energy Information Administration (or EIA) released its natural gas inventory for the week ended March 20. According to the report, stocks increased by 12 billion cubic feet (or Bcf) to 1,479 Bcf. Analysts were expecting an increase of 6 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), QEP Resources (QEP), Devon Energy (DVN), and Chesapeake Energy (CHK). All these companies are components of the Energy Select Sector SPDR ETF (XLE) and they make up 6.5~% of the ETF.

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Stocks remain below the five-year average despite the increase           

After the 12 Bcf build last week, natural gas inventories as of March 20 were ~64% higher than last year’s levels. However, despite the increase, they remain ~12% lower than the five-year average. Inventories briefly surpassed the five-year average a few weeks ago.

The net injection this week compares to a 56 Bcf withdrawal the same week last year and the five-year average net withdrawal of 19 Bcf for the week.

2014 inventories versus 2015 inventories

Abundant supplies and an unusually warm December marked 2014. 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, coupled with weak draws in early winter, inventories briefly surpassed the five-year average a few weeks back.

The EIA forecasted in its March STEO (“Short Term Energy Outlook”) that end-of-March 2015 inventories would total 1,587 Bcf. This forecast is 730 Bcf higher than March 2014 inventories. It’s interesting to note that current inventories are already under this level.

Weather is key for natural gas prices

A milder winter this year compared to last year has depressed natural gas prices—along with increased production, thanks to the shale evolution in the US. The next part of this series discusses the weather’s impact on natural gas prices last week.

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