Natural gas finally gets a boost with a smaller than expected inventory build

Market Realist

The weekly natural gas storage report affects natural gas prices

Every week, the Energy Information Administration (EIA) releases data on how much natural gas is stored in facilities across the United States. These figures, also called “natural gas inventories,” can affect U.S. natural gas prices and therefore the valuation of producers of natural gas. A larger than expected decrease, or “draw,” in inventories can reflect greater demand or less supply and is a positive for natural gas prices (and vice versa for a smaller than expected decrease). A larger than expected increase, or “build,” in inventories can reflect less demand or greater supply, which is a negative for natural gas prices. Natural gas prices affect the earnings and valuation of domestic natural gas producers such as Chesapeake Energy (CHK), Quicksilver Resources (KWK), Southwestern Energy (SWN), and Range Resources (RRC).

Reported inventories were in line with expectations

On July 18, the EIA reported that natural gas inventories increased 58 bcf (billion cubic feet) for the week ended July 12, bringing current inventories to 2,687 bcf. A survey of experts had expected the build in inventories to be 65 bcf. This is a positive indicator for natural gas prices, as it implies greater than expected gas demand, less than expected gas supply, or both. Natural gas prices closed at $3.81 per MMBtu (million British thermal units) compared to the prior day’s close of $3.63 per MMBtu.

Positive short-term catalyst

This week’s natural gas inventory build was greater than consensus estimates, resulting in a positive short-term catalyst. Investors who are long (that is, own shares in) natural gas through an ETF (exchange-traded fund) such as the U.S. Natural Gas Fund (UNG) or natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), and Quicksilver Resources (KWK) should monitor inventory draws and builds because they’re significant data points in the national supply and demand picture of natural gas. The supply and demand dynamics of the commodity affect the price and therefore the margins of companies that produce natural gas.

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