HardAssetsInvestor

Written by Sumit Roy  |

October 27, 2011

Natural Gas Report: Inventories Could Reach Record, But Seasonal Rally Possible

Details

Underlying fundamentals of the natural gas market remain extremely bearish, but prices could rally if colder-than-normal temperatures prevail in November.

The Energy Informational Administration (EIA) reported that storage operators injected 92 billion cubic feet of natural gas into storage in the week ending Oct. 21. That was in line with estimates calling for an injection between 86 bcf and 95 bcf, but above last year’s build of 40 bcf and the five-year average of 57 bcf.

These injections into storage are part of the yearly cycle of natural gas supply and demand. Insufficient natural gas going into storage now can mean shortages in the future during peak demand.

After last week’s injection, the inventory deficit against last year fell to 38 bcf, while the inventory surplus over the five-year average surged to 143 bcf. As can be seen from the chart below, recent injections have been significantly above the five-year average, indicating an extremely oversupplied market.

Indeed, storage now has a shot at surpassing last year’s record level of 3,840 bcf before seasonal winter withdrawals begin in November.

After the report, natural gas prices fell and were last trading near $3.50/mmbtu. Weather forecasts for November will determine whether prices can bottom out here and embark on some form of a seasonal rally. But whether or not the coming winter ends up colder than normal, upside will be capped, with any significant upside moves seen as shorting opportunities.