US natural gas inventories
On Thursday, October 15, 2015, the EIA (U.S. Energy Information Administration) published its weekly update on natural gas for the week ended October 9. The report showed that US natural gas inventories in storage had increased by 100 Bcf (billion cubic feet), causing inventories to rise to 3,733 Bcf that week. This was more than analyst expectations of a 92 Bcf increase.
What this means for investors
When inventories rise more than market expectations, it’s usually bearish news for natural gas prices, because it means that either demand was less than expected or supply was more than expected.
Natural gas prices settled ~2.6% lower at $2.45 per MMBtu (million British thermal units), on October 15, 2015, compared to the previous day’s close. In the next part of this series, we’ll take a more detailed look at the price movements of the week ended October 15.
Lower natural gas prices mean lower revenues for natural gas producers such as Chesapeake Energy (CHK), Range Resources (RRC), QEP Resources (QEP), and Cabot Oil & Gas (COG). These companies earn less money when natural gas prices fall and more money when prices rise. 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) and dissuade producers from producing more natural gas, which would result in lower volumes for the MLPs to transport.
The 100 Bcf net injection in the week ended October 9, 2015, compares to a net injection of 96 Bcf in the corresponding week last year and a five-year average net injection of 87 Bcf.
According to the EIA, from the week ended April 3, 2015, the beginning of the injection season, through the week ended October 9, 2015, net injections totaled 2,272 Bcf. In comparison, 2,453 Bcf were injected in the corresponding 28 weeks last year. The five-year average injection for the corresponding 28 weeks is 1,914 Bcf.
After the 100 Bcf increase in the week ended October 9, 2015, natural gas inventories were ~13.6% higher than last year’s levels and 4.7% higher than the five-year average. Inventories have been outpacing the five-year average since the week ended May 29, 2015. This is bearish for natural gas prices.
The EIA’s October STEO (Short-Term Energy Outlook) report released on October 6, 2015, forecasts that inventories will total 3,956 Bcf at the end of the injection season in October. According to the EIA, this would be the highest-recorded end-of-October inventory level.