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Smaller-than-expected inventory build supports 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 ethane stopped trading like crude and started trading like nat gas (part II))

Reported inventories were slightly below expectations

On August 22, the EIA reported that natural gas inventories increased 57 bcf (billion cubic feet) for the week ended August 16, bringing current inventories to 3,063 bcf. A survey of experts estimated the build in inventories to be 65 bcf. This is a positive indicator for natural gas prices, as it implies more-than-expected gas demand, less-than-expected gas supply, or both. Natural gas prices rose on the day, closing at $3.55 per MMBtu (millions of British thermal units) compared to the prior day’s close of $3.46 per MMBtu.

Other factors that have been affecting natural gas prices recently include summer weather and competition with coal in the power generation sector.

This week’s natural gas inventory build was less than consensus estimates, resulting in a positive 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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