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Natural gas trades up despite smaller-than-expected inventory draw

Ingrid Pan, CFA

Why natural gas traded against the inventory report (Part 1 of 2)

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 like Chesapeake Energy (CHK), Quicksilver Resources (KWK), Southwestern Energy (SWN), and Range Resources (RRC).

Reported inventory draw is less than expectations

On December 12, the EIA reported that natural gas inventories decreased 81 bcf (billion cubic feet) for the week ended December 6, bringing current inventories to 3,533 bcf. A survey of experts estimated the draw in inventories to be 87 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 continued a rally that has been ongoing since early November, closing at $4.41 per MMBtu (millions of British thermal units) compared to the prior day’s close of $4.34 per MMBtu, as the markets expected current cold weather to boost natural gas demand.

Investors who are long (that is, who own shares in) natural gas through an ETF like the U.S. Natural Gas Fund (UNG) or natural gas producers like 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.

Also note that similar information is reported about crude oil inventories. Please continue reading on to the next part of this series for more information.

Continue to Part 2

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