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Record Inventory versus Demand: Pressure on Natural Gas Prices

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Natural gas inventory report

On May 21, the EIA (U.S. Energy Information Administration) will release the weekly natural gas report. Last week, the EIA report showed that natural gas inventories rose by 111 Bcf (billion cubic feet) to 1,897 Bcf—up from 1,786 Bcf in the week ending May 8. The current stockpile is 737 Bcf more than the levels last year. However, it’s 38 Bcf lower than the five-year average of 1,935 Bcf.

Record inventories imply lower demand or more supply. This will put pressure on natural gas prices. Bloomberg estimates show that the stockpile could increase by 99 Bcf for the week ending May 15.

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Natural gas production

In its STEO (Short-Term Energy Outlook) May edition, the EIA projected that natural gas production will increase by 6% from the previous year and rise to 79.22 Bcf in 2015. The natural gas production from the Marcellus Shale region is expected to increase by 14% to 16.737 Bcf in June 2015—compared to last year. By volume, the Marcellus Shale is the biggest natural gas reservoir.

The mild weather forecast will curb the cooling demand of natural gas in the short term. This means that the current rally, led by the warmer weather forecast, will be balanced by increasing inventories and oversupplied natural gas. This suggests that prices could fall due to slowing demand. How far could natural gas prices fall?

Energy ETFs like the Energy Select Sector SPDR Fund (XLE) and the SPDR Oil & Gas Exploration & Production ETF (XOP) fell in the direction of natural gas prices in yesterday’s trade.

Lower gas prices negatively affect the largest natural gas producers like ConocoPhillips (COP), Anadarko Petroleum (APC), and Apache (APA). These stocks have a natural gas production mix that’s more than 40% of their total production. These companies account for 3.54% of the Spider Oil and Gas ETF (XOP).

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