Natural gas inventory
Every Thursday, the EIA (the U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. The latest report is for the week ending September 11. Throughout the year, natural gas is stored underground to save the fuel for peak demand during the winter. For the week ending September 11, inventory came in at 3,334 Bcf (billion cubic feet) compared to 3,261 Bcf a week earlier.
The inventory figure was higher than the 2,878 Bcf recorded the year before and the five-year average of 3,209 Bcf. The change of 73 Bcf in the underground inventory during the week of September 11 came in marginally higher than Wall Street analysts’ expectations of 72 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 23 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 the Midwest such as Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Peabody Energy (BTU).