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How Did Prices React to Less-Than-Expected Natural Gas Stocks?

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Aug. 25 2015, Published 8:39 a.m. ET

Natural gas inventories

On Thursday, August 20, the EIA (U.S. Energy Information Administration) published its “Natural Gas Weekly Update” for the week ended August 14. The report shows that the natural gas storage increase was 53 Bcf (billion cubic feet), causing inventories to rise to 3,030 Bcf that week. Analysts had been expecting a larger increase of 59 Bcf.

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What this means for investors

When inventories rise less than the market expects, it’s usually bullish for natural gas prices (UNG). It either means that demand is more than expected or that supply is less than expected.

Higher natural gas prices mean higher revenues for natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), QEP Resources (QEP), and Cabot Oil & Gas (COG). These companies earn more money when natural gas prices rise and less money when prices fall. All of these companies combined make up ~2% of the Vanguard Energy ETF (VDE).

Higher natural gas prices may also positively affect MLPs such as ONEOK Partners (OKS). Higher prices may encourage producers to produce more natural gas, which would mean higher volume for MLPs to transport. After the release of the EIA report, natural gas prices spiked and settled higher for the day.

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Weekly data

The 53 Bcf net injection in the week ended August 14 compares to a net injection of 86 Bcf in the corresponding week last year and a five-year average net injection of 54 Bcf.

According to the EIA, from the week ended April 3, the beginning of the injection season, through the week ended August 14, net injections totaled 1,569 Bcf. In comparison, 1,709 Bcf were injected in the corresponding 20 weeks last year. The five-year average injection for the corresponding 20 weeks is 1,299 Bcf.

Current inventories

After the 53 Bcf build in the week ended August 14, natural gas inventories were ~19.2% higher than last year’s levels and 2.7% higher than the five-year average. Inventories have been outpacing the five-year average since the week ended May 29. This is bearish for natural gas prices, and could weigh on prices, despite the less-than-expected build in inventories in the latest report. The following part of this series discusses how prices moved last week.

Forecasts

The EIA’s August STEO (Short-Term Energy Outlook) report, released on August 11, forecasts that inventories will total 3,867 Bcf at the end of the injection season in October. That would be 61 Bcf, or 1.6%, higher than the five-year average.

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