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1 key reason natural gas prices dropped after a strong rally

Ingrid Pan, CFA

Which indicator helped crude oil prices but hurt natural gas? (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).

Natural gas inventories dropped slightly lower than expected

On February 6, 2014, the EIA reported that natural gas inventories decreased 262 bcf (billions of cubic feet) for the week ended January 31, bringing current inventories to 1,923 bcf. A survey of experts estimated the draw in inventories to be 272 bcf. This week’s drop in natural gas inventories was slightly lower than the market’s expectation, which indicated either weaker demand or stronger supply than expected. Investors can interpret this fall as a negative signal for natural gas prices. Consequently, natural gas prices closed at $ 4.93 per MMBtu, $0.10 per MMBtu lower than 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 also the margins of companies that produce natural gas. This week’s smaller-than-expected draw of natural gas inventories drove natural gas prices down. Lower natural gas prices are negative catalysts for holders of gas-weighted energy names like CHK. However, from a mid-term perspective, investors should note that natural gas has had a strong rally in the past few weeks. For more on how to trade natural gas prices, see Must-know recommendation: Key ways to play the natural gas rally.

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