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Why natural gas prices dropped after hitting a 5-year high

Ingrid Pan, CFA

Why inventories are bearish for both natural gas and crude oil (Part 2 of 2)

(Continued from Part 1)

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 U.S. 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 such as Chesapeake Energy (CHK), Quicksilver Resources (KWK), Southwestern Energy (SWN), and Range Resources (RRC).

Natural gas inventories dropped slightly less than expected

On February 20, 2014, the EIA reported that natural gas inventories decreased by 250 bcf (billions of cubic feet) for the week ended February 14, bringing current inventories to 1,443 bcf. A survey of experts estimated the draw in inventories to be 257 bcf. This week’s drop in natural gas inventories was slightly lower than the market’s expectation, which indicated either weaker demand or stronger supply than expected. Investors can interpret this as a negative signal for natural gas prices. Natural gas prices closed at $6.06 per MMBtu—$0.09 per MMBtu lower than the previous day, when natural gas hit a five-year high of $6.15 per MMBtu. This was partly due to the market’s expectation of the coming cold storm.

Natural gas price volatility is important for gas-weighted energy companies like CHK

Investors who are long natural gas through an ETF 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, the margins of companies that produce natural gas. This week’s lower-than-expected draw of natural gas inventories slightly hurt natural gas prices. However, from a mid-term perspective, investors should note that natural gas has had a strong rally in the past few weeks.

For more on how to trade natural gas prices, see Must-know recommendation: Key ways to play the natural gas rally. Also, for more on the latest natural gas prices, please see Why natural gas prices soared last week to close at $5.21 per MMBtu.

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