Why natural gas prices slid a lot despite neutral inventory data
Why oil and gas prices dropped despite positive inventory data (Part 2 of 2)
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 slightly higher than expected
On January 9, 2014, the EIA reported that natural gas inventories decreased 157 bcf (billions of cubic feet) for the week ended January 3, bringing current inventories to 2,817 bcf. A survey of experts estimated the draw in inventories to be 154 bcf. Although inventories dropped slightly more than expected, prices declined on the day. Natural gas prices closed at $4.01 per MMBtu, compared to $4.22 per MMBtu the day prior. Natural gas markets likely traded on forecasts of warmer-than-normal weather through mid-January following a recent cold snap. For more on why weather affects natural gas demand and prices, see Why continuous cold weather is positive for natural gas prices.
This week’s natural gas inventories drop was greater than expectations, but prices fell on warm weather forecasts
Investors who are long (that is, who own shares in) 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 also the margins of companies that produce natural gas. This week’s draw in inventories data was nearly the same as analysts expected, which can be treated as a neutral indicator for natural gas prices. However, markets traded lower on expectations of decreased demand from future milder weather.
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