Why natural gas prices rose to their highest point since July 2011

Market Realist

Why oil and natural gas inventory reports affected prices (Part 2 of 2)

(Continued from Part 1)

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 natural gas producers. A larger-than-expected decrease, or “draw,” in inventories can reflect greater 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).

Reported inventory draw was more than expected

On December 19, the EIA reported that natural gas inventories decreased 285 bcf (billion cubic feet) for the week ended December 13, bringing current inventories to 3,248 bcf. A survey of experts estimated the draw in inventories to be 260 bcf. This is a positive indicator for natural gas prices, as it implies more-than-expected gas demand, less-than-expected gas supply, or both. Natural gas prices rallied in response, closing at $4.46 per MMBtu (millions of British thermal units) compared to the prior day’s close of $4.25 per MMBtu.

This week’s natural gas inventory draw was more than consensus estimates, resulting in a positive short-term catalyst

Investors who are long (that is, who 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 its price and therefore also the margins of companies that produce natural gas.

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