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Natural gas inventory beats expectations, weighing down 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).

Reported inventories were below expectations

On October 31, the EIA reported that natural gas inventories increased 38 bcf (billion cubic feet) for the week ended October 25, bringing current inventories to 3,779 bcf. A survey of experts estimated the build in inventories to be 34 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 dropped on the day to $3.58 per MMBtu (millions of British thermal units) from $3.62 per MMBtu the day prior.

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.

Heading into the winter season, weather is a major factor affecting natural gas demand, and therefore inventories and prices. A milder weather outlook has caused natural gas prices to slide to levels of below $3.50 per MMBtu currently. For more on this factor see Colder-than-normal weather is a positive catalyst for natural gas.

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