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 cover the latest report for the week ending November 25, 2016.
Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ending November 25, the natural gas inventory came in at 3,995 Bcf (billion cubic feet)—compared to 4,045 Bcf the previous week.
The inventory figure was higher than 3,971 Bcf recorded during the same week in 2015. It was also higher than the five-year average of 3,760 Bcf. A decrease of 50 Bcf in the underground natural gas inventory during the week ending November 25 was lower than analysts’ expectations of 53 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. So, they’re useful in getting a sense of natural gas prices.
Natural gas inventory impacts coal
A higher-than-expected natural gas inventory indicates 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 fall.
Currently, natural gas prices are at multiyear lows. Persistently low natural gas prices over the past few months hurt coal producers (KOL), especially those with operations in the East and Midwest parts of the US. Some of these companies are Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ARCH), and Peabody Energy (BTUUQ).
Now, let’s take a look at what happened with natural gas prices.