Natural gas inventory
Every Thursday, the EIA (US Energy Information Administration) publishes a natural gas inventory report for the previous week. This series will cover the latest report for the week ending January 20, 2017.
Throughout the year, natural gas is stored underground to save fuel for peak demand during the cold winter months. For the week ending January 20, natural gas inventory came in at 2,798 Bcf (billion cubic feet), as compared to 2,917 Bcf one week earlier.
This inventory figure was lower than the 3,146 Bcf recorded during a comparable week in 2016. Moreover, it was lower than the five-year average of 2,818 Bcf for the fifth week in a row. The fall of 119 Bcf in the underground natural gas inventory during the week ended January 20, 2017, was greater than analysts’ expectations of 117 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.
By 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, and 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 higher demand for natural gas. This, in general, has a positive impact on natural gas prices. Any increase in natural gas prices is positive for thermal coal producers because utilities (XLU) tend to burn more natural gas when natural gas prices are on the dip.
However, natural gas prices are now at multiyear lows, and persistent low natural gas prices over past few months have hurt coal producers (KOL), particularly those with operations in the US East and Midwest. These companies include Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), Arch Coal (ARCH), and Peabody Energy (BTUUQ).
Now let’s take a look at what just happened with natural gas prices.