Why Natural Gas Prices Shrugged Off Bearish Headline Inventory Data



Natural gas prices

Natural gas prices increased by ~0.37% between Friday, August 28, and Thursday, September 2. Prices closed at $2.725 per MMBtu (British thermal units in millions) on September 2. On August 28, prices closed at $2.715 per MMBtu.

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

With higher prices, natural gas producers may be inclined to produce more. This would in turn be positive for the energy MLP sector, which includes companies such as MarkWest Energy Partners (MWE). Higher production would mean higher volumes to transport, which could boost MLP revenues.

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Price movements

Natural gas prices on Monday, August 31, fell ~1% from the previous Friday’s closing price of $2.715 per MMBtu. Prices settled at $2.689 per MMBtu. Prices fell on moderate weather forecasts by the middle of September. Hot temperatures increase the demand for natural gas for electricity generation. Moderate or cooler temperatures would reduce this demand.

However, prices turned around on Tuesday as a result of weather forecasts. WSI called for hotter temperatures across Southern and Eastern regions in the upcoming two weeks. Prices increased by 0.48% to settle at $2.702 per MMBtu.

Prices fell again on Wednesday as a result of cooler weather forecasts. MDA Weather Service and Commodity Weather Group forecasted below normal temperatures across major portions of the Midwest as well as the Chicago region. Prices fell ~2% and settled at $2.648 per MMBtu.

On Thursday, prices rose despite a bearish EIA (US Energy Information Administration) report, which showed a larger-than-expected storage inventory number, as we discussed in the previous part of this series. This is because the 94 Bcf injection in the week ending August 28 included an 8-Bcf reclassification, which was previously announced by TransCanada’s (TRP) ANR Pipeline. So, the markets had already priced in the bearish report. The actual addition to stocks was 86 Bcf, which was less than the 90 Bcf injection analysts had forecasted. This drove prices higher. Prices gained 2.9% to close at $2.725 per MMBtu.

Natural gas prices seem to have felt the effect of the bearish inventory number the next day, as they were trading near ~$2.7 per MMBtu early on Friday.

The next part of this series analyzes how various securities that are exposed to natural gas performed last week.


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