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Natural gas prices stable despite bearish inventory figures

Ingrid Pan, Sr Energy Analyst

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 ethane stopped trading like crude and started trading like nat gas (part II))

Reported inventories exceeded expectations

On August 8, the EIA reported that natural gas inventories increased 96 bcf (billion cubic feet) for the week ended August 2, bringing current inventories to 2,941 bcf. A survey of experts estimated the build in inventories to be 79 bcf. However, note the 14 bcf of the change in inventories

This is a negative indicator for natural gas prices, as it implies less-than-expected gas demand, greater-than-expected gas supply, or both. Despite the bearish (negative) inventory figures, natural gas prices rose slightly, closing at $3.30 per MMBtu (millions of British thermal units) compared to the prior day’s close of $3.25 per MMBtu.

Natural gas prices may have risen in the face of bearish storage figures, as traders may have believed the commodity to be oversold. Plus, when natural gas prices fall enough, power plants are incentivized to switch to natural gas over coal, providing a floor to natural gas prices. For more about coal-to-gas switching, please see Why natural gas continues to lose market share to coal.

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: Why ethane stopped trading like crude and started trading like nat gas (part III))

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