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Natural Gas Inventory Draw-Down Was Lower 2 Weeks in a Row

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Natural gas inventory

Every Thursday, the EIA (U.S. Energy Information Administration) publishes a natural gas inventory report for the previous week. In this series, we’ll discuss the latest report for the week ending December 2, 2016.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ending December 2, the natural gas inventory came in at 3,953 Bcf (billion cubic feet)—compared to 3,995 Bcf one week earlier.

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The inventory figure was higher than 3,902 Bcf recorded during a comparable week in 2015. It was also higher than the five-year average of 3,699 Bcf. A decrease of 42 Bcf in the underground natural gas inventory during the week ending December 2 was marginally lower than analysts’ expectations of 43 Bcf.

Why is the EIA 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. As a result, they’re useful in getting a sense of natural gas prices.

Natural gas inventory impacts coal

A higher-than-expected natural gas inventory indicates a higher-than-expected natural gas supply or lower demand for natural gas. In general, it has a negative impact on natural gas prices. A decrease in natural gas prices is negative for thermal coal producers because utilities (XLU) tend to burn more natural gas when natural gas prices are lower.

Currently, natural gas prices are still at multiyear lows. Persistently low natural gas prices over the past few months have hurt coal producers (KOL), especially those with operations in the US East and Midwest. Some of these companies are Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ARCH), and Peabody Energy (BTUUQ).

In the next part, we’ll discuss what happened with natural gas prices.

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