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Why a bullish inventory report helped lift 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 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).

Natural gas inventories decreased more than expected

On November 21, the EIA reported that natural gas inventories decreased 45 bcf (billion cubic feet) for the week ended November 15, bringing current inventories to 3,834 bcf. A survey of experts estimated the draw in inventories to be 37 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 spot prices rose slightly on the day, closing at $3.68 per MMBtu (millions of British thermal units) compared to the prior day’s close of $3.62 per MMBtu.

Heading into winter, one of the major drivers of natural gas demand that could affect inventories is how cold temperatures are. For more background on how cold weather affects natural gas prices, see Why last week’s cold weather was a major positive for gas prices.

This week’s natural gas inventory draw was more 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.

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