US natural gas inventories
On Thursday, October 22, 2015, the EIA (U.S. Energy Information Administration) published its weekly update on natural gas for the week ended October 16. The report showed that US natural gas inventories in storage increased by 81 Bcf (billion cubic feet), causing inventories to rise to 3,814 Bcf that week. This was less than analyst expectations of an 88 Bcf increase.
What this means for investors
When inventories rise less than market expectations, it’s usually bullish news for natural gas prices because it means that either demand was more than expected or supply was less than expected.
However, natural gas prices settled ~0.75% lower at $2.39 per MMBtu (million British thermal units) on October 22 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 22.
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 81 Bcf net injection in the week ended October 16, 2015, compares to a net injection of 94 Bcf in the corresponding week last year and a five-year average net injection of 86 Bcf.
According to the EIA, from the week ended April 3, 2015, the beginning of the injection season, through the week ended October 16, 2015, net injections totaled 2,353 Bcf. In comparison, 2,547 Bcf were injected in the corresponding 29 weeks last year. The five-year average injection for the corresponding 29 weeks is 2000 Bcf.
After the 81 Bcf increase in the week ended October 16, 2015, natural gas inventories were ~12.8% higher than last year’s levels and 4.5% 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 end-of-October inventory level on record.