Why the latest inventory reports were bearish for oil and gas (Part 1 of 2)
The weekly natural gas storage report affects natural gas prices
Every week, the Energy Information Administration (the EIA) releases data on how much natural gas is stored in facilities across the U.S. These figures, also called “natural gas inventories,” can affect U.S. natural gas prices and, therefore, the valuation of natural gas producers. A larger-than-expected decrease, or “draw,” in inventories can reflect more demand or less supply (or both) 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).
Natural gas inventories increased more than expected
On Thursday, May 1, 2014, the EIA reported that natural gas inventories increased by 82 bcf (billions of cubic feet) for the week ended April 25, bringing current inventories to 981 bcf. A survey of experts had estimated the rise in inventories to be 76 bcf. Last week’s build in natural gas inventories was larger than the market’s expectation, which indicated either weaker demand or stronger supply than expected. Investors can interpret this as a negative signal for natural gas prices. Natural gas prices traded lower on the day, to close at $4.72 per MMBtu—compared to $4.82 per MMBtu the previous day.
Natural gas price volatility is important for gas-weighted energy companies like CHK
Investors who are long natural gas through an ETF 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 its price and, therefore, the margins of companies that produce natural gas. This week’s slight drop in natural gas prices could then be negative news for these companies.
From a medium-term outlook, natural gas has dropped from recent highs of over $6 per MMBtu and has fluctuated around $4.50 per MMBtu during the past few weeks, as short-term squeezes in natural gas supply due to cold weather caused prices to spike for short periods. Still, natural gas prices remain up significantly since last October, when the front month contract for Henry Hub natural gas was trading around ~$3.50 per MMBtu.
For more recommendations on how to trade natural gas prices, see the Market Realist series Key ways to trade oil and gas price movements on Ukraine tension.
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