US natural gas inventories
On Thursday, September 3, the EIA (U.S. Energy Information Administration) published its “Natural Gas Weekly Update” for the week ended August 28. The report showed that US natural gas inventories in storage increased by 94 Bcf (billion cubic feet), causing inventories to rise to 3,193 Bcf that week. Analysts had been expecting a slightly smaller increase of 90 Bcf.
However, the EIA reported a reclassification that totaled 8 Bcf in the East Region of working gas to base gas, which was included in the 94 Bcf report figure. Therefore, the adjusted increase in inventories in the week ended August 28 was 86 Bcf.
What this means for investors
When inventories rise more than the market expects, it’s usually bearish for natural gas prices (UNG). It either means that demand was less than expected or that supply was more than expected. However, natural gas prices settled ~3% higher compared to the previous close, despite the bearish inventory data. The next part of this series discusses last week’s price movements in detail. We will examine why prices rose despite the bearish news.
Lower natural gas prices mean lower revenues for natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), QEP Resources (QEP), and Cabot Oil & Gas (COG). These companies earn less money when natural gas prices fall and more money when prices rise. All of these companies combined make up ~2% of the Vanguard Energy ETF (VDE).
Lower natural gas prices may also negatively affect MLPs such as ONEOK Partners (OKS). Lower prices may dissuade producers from producing more natural gas, which would mean lower volume for MLPs to transport.
The 94 Bcf net injection in the week ended August 28 compares to a net injection of 79 Bcf in the corresponding week last year and a five-year average net injection of 60 Bcf.
According to the EIA, from the week ended April 3, the beginning of the injection season, through the week ended August 28, net injections totaled 1,732 Bcf. In comparison, 1,865 Bcf were injected in the corresponding 22 weeks last year. The five-year average injection for the corresponding 22 weeks is 1,420 Bcf.
After the 94 Bcf build in the week ended August 28, natural gas inventories were ~18.3% higher than last year’s levels and 4% 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.
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.
The EIA will release its next STEO on September 9.