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Natural Gas Drawdown Beats Expectations 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. This series will cover the latest report for the week ended January 13, 2017.

Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ended January 13, natural gas inventory came in at 2,917 Bcf (billion cubic feet) compared to 3,160 Bcf one week earlier.

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The inventory figure was lower than the 3,348 Bcf recorded during the comparable week in 2016. It was also lower than the five-year average of 2,994 Bcf for the fourth week in a row. A fall of 243 Bcf in the underground natural gas inventory during the week ended January 13, 2017, was higher than analysts’ expectations of 231 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.

The impact of natural gas inventory on coal

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

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

Next, let’s take a look at what just happened with natural gas prices.

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