Why natural gas prices plummeted to $4.40 on higher inventories
Why inventories moved both crude oil and natural gas prices (Part 4 of 4)
Natural gas inventories beat expectations for the past week
On Thursday, June 26, 2014, the U.S. Energy Information Administration (or EIA) reported that natural gas inventories increased by 110 bcf (billion cubic feet) for the week ending June 20, bringing current inventories to 1,829 bcf. A survey of experts had estimated the increase in inventories to be 103 bcf.
Last week’s build in natural gas inventories was more than the market’s expectation, which indicated 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 $4.40 per million British thermal units (or MMBtu)—compared to $4.55 per MMBtu the previous day.
Natural gas price volatility is important for gas-weighted energy producers like Chesapeake Energy
Investors with stake in natural gas through an ETF such as the U.S. Natural Gas Fund (UNG) or natural gas producers such as Chesapeake Energy (CHK), Devon Energy (DVN), Range Resources (RRC), and Quicksilver Resources (KWK) should monitor inventory draws and builds. These changes are 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, in turn, the margins of companies that produce natural gas. This week’s decrease in natural gas prices is a negative for these companies.
Background: Natural gas inventories are far lower than average
Current natural gas inventories are roughly 33% lower than the average of the past five years because last winter brought extremely cold weather. Natural gas demand surged. This rise led to a large depletion of inventories and an increase in prices. The front month natural gas futures contract traded around ~$3.50 per MMBtu in early November to peak above $6 per MMBtu at points in February. It’s currently ~$4.40 per MMBtu.
The markets will watch to see how natural gas inventories move through the spring and summer ahead of the peak winter demand season. Inventory levels that remain below average could prime natural gas prices for a rally this coming winter.
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