Natural gas inventories
The US Energy Information Administration’s (or EIA) “Natural Gas Weekly Update” for the week ended June 26 showed that natural gas inventories increased by 69 billion cubic feet (or bcf) to 2,577 bcf. Analysts were expecting an increase of 70 Bcf.
What that means for investors
When inventories rise in line with market expectations, they’re neutral for natural gas prices. This situation means that markets have already priced demand-supply fundamentals in. The difference between actual and expected changes in inventories can drive short-term prices.
Natural gas prices drive the margins of natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), Range Resources (RRC), and QEP Resources (QEP). These companies tend to make more money when natural gas prices rise and less money when they fall. All these companies are components of the iShares U.S. Energy ETF (IYE), and they make up ~3% of the ETF.
Natural gas prices also affect midstream MLPs (master limited partnership) like MarkWest Energy Partners (MWE). Lower prices demotivate producers from producing natural gas, which means lower volumes for MLPs to transport. The opposite is also true.
The 69 bcf net injection in the week of June 26 compares to a net injection of 102 bcf in the same week last year and a five-year average net injection of 75 bcf.
Per the EIA, from the week ended April 3—which is the beginning of the injection season—through the week ended June 26, net injections totaled 1,116 bcf. This compares to a 1,082 bcf injection in the same 13 weeks last year, and a 897 bcf five-year average.
After the 69 bcf build, natural gas inventories as of June 26 were ~35% higher than last year’s levels and 1.1% higher than the five-year average. Inventories have been outpacing the five-year average since the week of May 29.
Markets will keep a close watch to see if inventories will fall back to below five-year levels in the weeks to come. However, if inventories continues to outpace the five-year range, they would be bearish for natural gas prices.
The EIA’s June STEO (“Short-Term Energy Outlook”), released on June 9, forecasts the end of injection season’s (October’s) inventories to total 3,912 bcf. This is 115 bcf higher than the previous five-year average.
The next STEO is expected on July 7.
In the next part of this series, read how natural gas prices performed this week.