Natural gas inventory is important to energy company investors

Market Realist

Inventory data—crude oil is choppy, while natural gas is hopeful (Part 6 of 8)

(Continued from Part 5)

Natural gas inventory figures

The U.S. Energy Information Administration (or EIA) reports figures on natural gas inventories on a weekly basis. Markets monitor these figures because inventory data can indicate supply and demand trends.

If the increase in natural gas inventories is greater-than-expected, it implies either greater supply or weaker demand and it’s bearish for natural gas prices. If the increase in natural gas inventories is less-than-expected, it implies either weaker supply or greater demand and it’s bullish for natural gas prices.

Natural gas prices have been in a downward trend lately. The downward trend won’t be good for gas-weighted producers like Chesapeake Energy (CHK), Cabot Oil and Gas (COG), Range Resources (RRC), and Southwestern Energy (SWN).

Many of these companies look to see how the coming winter months will affect prices. Natural gas usage is the highest in the winter. All of these companies are components of energy exchange-traded funds (or ETFs) such as the Energy Select Sector SPDR ETF (XLE).

Seasonality of natural gas inventories

Natural gas use is highest in the winter. In the winter months, the fuel is needed to heat homes. Natural gas storage levels start decreasing in late October or early November, when the winter heating season begins. U.S. natural gas storage levels generally decrease until late March or early April, when the weather starts to warm up again. Natural gas storage levels usually increase again during the fall.

The use of natural gas can increase during periods of hot weather because electricity is used to power cooling devices such as air conditioners. During the summer, natural gas inventories generally increase, although at a slower rate than during the “shoulder seasons” during the spring and fall.

This summer, forecasts for a cooler-than-usual summer have been driving prices lower. A forecast for warmer weather last week actually drove prices up from an eight-month low.

In the next part we’ll discuss the changes in natural gas inventories last week and how they impacted natural gas prices.

 

Continue to Part 7

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