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 August 21. Throughout the year, natural gas is stored underground to save the fuel for peak demand during the winter. For the week ended August 21, inventory came in at 3,099 Bcf (billion cubic feet) compared to 3,030 Bcf a week earlier.
The inventory figure was higher than the 2,619 Bcf the year before and the five-year average of 3,011 Bcf. The change implies an addition of 69 Bcf to the underground inventory during the week of August 21. The addition came in higher than Wall Street analysts’ expectation of 61 Bcf.
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 21 weeks since injection season started. If the inventory is higher than expected, it indicates a higher-than-expected supply or lower-than-expected demand. This puts pressure on natural gas prices. A fall in natural gas prices is negative for thermal coal producers, as utilities (XLU) burn less coal when natural gas prices fall. In the current low natural gas price environment, coal is losing market share to natural gas.
The fall in natural gas prices over the last few months has hurt coal producers (KOL), especially those with operations in the East and the Midwest like Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Peabody Energy (BTU).