Natural Gas Futures Rally Despite Bearish Inventory Data

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected decrease in natural gas supplies. Nevertheless, prices rose for the week on expectations of colder weather and the resultant strength in the commodity’s demand.

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: Smaller-than-Expected Draw

Stockpiles held in underground storage in the lower 48 states fell by 33 billion cubic feet (Bcf) for the week ended Nov 24, below the guidance (of 38 Bcf decline) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

Worse, the decrease was lower than both last year’s drop of 43 Bcf and the five-year (2012-2016) average net shrinkage of 47 Bcf for the reported week. Following past week’s decline – third withdrawal of the 2017-2018 winter heating season – the current storage level now stands at 3.693 trillion cubic feet (Tcf) - 107 Bcf (2.8%) under the five-year average and 309 Bcf (7.7%) below the year-ago figure.

Fundamentally speaking, total supply of natural gas averaged around 81.9 Bcf per day, up marginally (less than 1%) on a weekly basis due to higher production. Meanwhile, daily natural gas consumption decreased 5.4% to 80.8 Bcf. The sharp pullback in demand was triggered by a 10.1% fall in residential/commercial consumption on the back of warmer temperatures. Moreover, natural gas consumption for power generation was down by 5% from the previous week.

Futures Jump Despite Bearish EIA Data

Shrugging off EIA’s latest commentary, natural gas prices soared around 5% last week to settle at $3.061 per MMBtu on Friday as investors chose to bet on the return of colder weather (translating into strong heating gas demand) over the next few weeks.

Positive Long-Term Thesis

Despite occasional hiccups, the fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.

The EIA predicts global demand for the commodity to grow from 340 Bcf per day in 2015 to 485 Bcf per day by 2040. Countries in Asia and in the Middle East – led by China’s transition away from coal – will account for most of this increase.

And it will be the world’s largest gas producer U.S., which will step up to meet this soaring demand. With domestic prices struggling to break the $3 per million Btu threshold, U.S. natural gas companies see a big opportunity in selling cheap U.S. production at higher prices to rest of the world. In fact, more than 50% of the domestic volume growth in the near future will be used for export in the form of liquefied natural gas (LNG). As per Paris-based International Energy Agency (IEA), the United States will vie with Australia and Qatar as the top LNG exporter by 2022.

Apart from the growing use of LNG and booming exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand with price eventually settling well above $3.

The perceived price strength augurs well for natural gas-heavy upstream companies like Rex Energy Corp. (NASDAQ:REXX) , 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) .

Want to Own a Natural Gas Stock Now?

If you are looking for a near term natural gas play, Rice Midstream Partners L.P. (NYSE:RMP) may be a good selection. This company actually has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Canonsburg, PA, Rice Midstream is a partnership focused on owning, operating and developing dry gas from the Utica and Marcellus producing regions. The midstream operator has an excellent earnings surprise history. It surpassed estimates in three of the last four quarters at an average rate of 35.3%

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