Natural Gas Build Tops 5-Year Average

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected rise in natural gas supplies. However, on a bearish note, the storage build was above the benchmark 5-year average level.

About the Weekly Natural Gas Storage Report

The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data

Stockpiles held in underground storage in the lower 48 states rose by 65 billion cubic feet (Bcf) for the week ended Aug 9, 2013, below the guided range (of 68–72 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI). However, the increase – the eighteenth injection of 2013 –exceeded both last year’s build of 20 Bcf and the 5-year (2008–2012) average addition of 42 Bcf for the reported week.

Following past week’s build, the current storage level – at 3.006 trillion cubic feet (Tcf) – is now 43 Bcf (1.5%) above the 5-year average. However, supplies are still down 252 Bcf (7.7%) from the last year’s level.

Natural gas stocks hit an all-time high of 3.929 Tcf in 2012, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remained robust. In fact, the oversupply of natural gas pushed down prices to a 10-year low of $1.82 per million Btu (MMBtu) during late Apr 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

However, things started to look up in 2013. This year, cold winter weather across most parts of the country boosted natural gas demand for space heating by residential/commercial consumers. This, coupled with flat production volumes, meant that the inventory overhang was gone, thereby driving commodity prices to around $4.40 per MMBtu in Apr – the highest in 21 months.

Outlook

During the last few weeks, though, natural gas demand has gone through a relatively lean period, as mild weather has prevailed over the country, leading to tepid electricity draws to run air conditioners. This has led to another slide in the commodity’s price.

In fact, healthy injections over last few weeks, plus strong production have meant that supplies have overturned the deficit over the five-year average for the first time since late March. This, in turn, is expected to pull down natural gas producers, particularly small ones like Comstock Resources Inc. (CRK). While big players like Chesapeake Energy Corp. (CHK) and Exxon Mobil Corp. (XOM) – both Zacks Rank #3 (Hold) stocks – are better equipped than others, we caution investors about Comstock, which also sports a Zacks Rank #3 (Hold).

With the commodity’s price staying on the defensive – at around $3.40 per MMBtu – brokerage analysts have downgraded their forecasts on natural gas-weighted companies and related support plays, leading to negative estimate revisions.

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