Natural Gas Drops Sharply Amid Irma-Stoked Demand Worries

The U.S. Energy Department's weekly inventory release showed an above-average increase in natural gas supplies following which the commodity traded down. Worries over the fuel’s tepid demand on the back of Hurricane Irma-related power outages further pushed down natural gas prices.

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: In-Line Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 65 billion cubic feet (Bcf) for the week ended Sep 1, 2017, at par with the guidance as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

However, the increase was higher than both last year’s addition of 38 Bcf and the 5-year (2012-2016) average net injection of 58 Bcf for the reported week. This caused the current storage level – at 3.220 trillion cubic feet (Tcf) – to slightly widen its surplus to the five-year average to 15 Bcf (0.5%), while stocks are still 212 Bcf (6.2%) below the year-ago figure.

The largely unsupportive data prompted natural gas prices to fall 1.9 cents (or 0.6%) to $2.981 per MMBtu on Thursday.

Fundamentally speaking, supply rose 2.3% on a weekly basis to 79 Bcf per day, while daily natural gas consumption declined 1.5% to 66.5 Bcf. The increase in supply could be attributed to higher dry natural gas production. On the demand side, the fall was triggered by sharply lower residential and commercial consumption. Meanwhile, Mexican gas exports were up some 5.1% to inch up closer to pre-Hurricane Harvey levels.

Prices Suffer From Irma Impact

The aftermath of Hurricane Irma also weighed on natural gas prices.

With the storm cutting off electricity to at least 4.5 million customers in Florida, power and manufacturing sector consumption will be depressed for the next several days. The big storm has also brought cool temperatures to the region, limiting air conditioning demand. This prompted natural gas to end down 5.9% for the week to $2.89 per MMBtu.

Further, Irma-induced demand losses – following on the heels of Hurricane Harvey’s disruptions – are set to translate into big storage builds over the coming weeks, extending the two-year old supply glut and pressurizing prices.

The perceived short-term price weakness from the above factors might negatively impact natural gas-heavy upstream companies like Rice Energy Inc. (NYSE:RICE) , Chesapeake Energy Corp. (NYSE:CHK) , Southwestern Energy Co. (NYSE:SWN) , WPX Energy Inc. (NYSE:WPX) , Cabot Oil & Gas Corp. (NYSE:COG) and EQT Corp. (NYSE:EQT) .

Positive Long-Term Thesis

Despite occasional hiccups, long-term fundamentals for the commodity continue to be supportive on the back of structural imbalances. While domestic natural gas production is expected to rebound this year, the growing use of liquefied natural gas (or LNG), booming LNG and Mexican exports, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output. The resulting effect will ensure natural gas storage keeping pace with the five-year average in the near future, with deficits piling up later on. Over time, these secular tailwinds are likely to support natural gas sentiment and price.

Want to Own a Natural Gas Stock Now?

If you are still looking for a near term natural gas play, Range Resources Corp. (NYSE:RRC) may be a good selection. This company actually has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S. The 2017 Zacks Consensus Estimate for this company is 48 cents, representing some 1,494.9% earnings per share growth over 2016. Next year’s average forecast is 61 cents, pointing to another 28% growth.

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