Natural gas inventory
Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ended September 18. Throughout the year, natural gas is stored underground to save the fuel for peak demand during the winter. For the week ended September 18, inventory came in at 3,440 Bcf (billion cubic feet) compared to 3,334 Bcf a week earlier.
The inventory figure was higher than the 2,974 Bcf recorded the year before and the five-year average of 3,292 Bcf. The change of 106 Bcf in the underground inventory during the week ended September 18 came in substantially higher than 97 Bcf anticipated by Wall Street analysts.
Why is this report important?
Commodity prices are a function of supply and demand. If demand rises while supply remains constant, prices rise because more customers are chasing each unit of a commodity.
In contrast, if supply rises for a given level of demand, prices fall because the commodity is available in abundance. Inventory levels reflect supply and demand trends, so they’re useful for getting a sense of natural gas prices.
Impact on coal
The natural gas inventory has risen over the past 24 weeks since the injection season started. A higher-than-expected inventory indicates a higher-than-expected supply or lower-than-expected demand. This puts pressure on natural gas prices. A drop in natural gas prices is negative for thermal coal producers, as utilities (XLU) burn more natural gas when natural gas prices drop.
The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and Midwest such as Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), and Peabody Energy (BTU).