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Bearish inventory report drags down natural gas prices

Ingrid Pan, CFA

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 producers of natural gas. 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).

(Read more: Why you should consider risks before investing in the Utica Shale)

Reported inventories were above expectations

On September 5, the EIA reported that natural gas inventories increased 58 bcf (billion cubic feet) for the week ended August 30, bringing current inventories to 3,188 bcf. A survey of experts estimated the build in inventories to be 54 bcf. This is a negative indicator for natural gas prices, as it implies less-than-expected gas demand, more-than-expected gas supply, or both. Natural gas prices fell on the day, closing at $3.58 per MMBtu (millions of British thermal units) compared to the prior day’s close of $3.68 per MMBtu, as traders anticipated hotter weather to come. For more on how weather affects natural gas prices, see Warm weather helped gas price but few catalysts going into autumn.

This week’s natural gas inventory build was more than consensus estimates, resulting in a negative 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.

(Read more: 2Q13 earnings calls were positive for Utica Shale investment)

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