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Natural gas inventories beat forecasts, but weather buoyed prices

Ingrid Pan, CFA

The weekly natural gas storage report affects natural gas prices

Every week, the Energy Information Administration (the 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 US 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 valuations of domestic natural gas producers such as Chesapeake Energy (CHK), Quicksilver Resources (KWK), Southwestern Energy (SWN), and Range Resources (RRC).

Reported inventories were below expectations

On October 24, the EIA reported that natural gas inventories increased 87 bcf (billion cubic feet) for the week ended September 18, bringing current inventories to 3,741 bcf. A survey of experts estimated the build in inventories to be 81 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. Despite this, natural gas prices were roughly unchanged, as forecasts for cold weather signaled increased demand. Prices closed at $3.63 per MMBtu (million British thermal units) compared to $3.62 per MMBtu the day prior. For more on why weather affects natural gas prices, see Why milder-than-normal weather impacts natural gas demand.

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 US 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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