The U.S. Energy Department's weekly inventory release showed a
smaller-than-expected increase in natural gas supplies, as
consumption (for power burn) improved slightly on the back of
seasonal temperatures in parts of the country.
Despite the meager (and below estimate) supply build, the
injection - the seventh in 2012 - has added to already bloated
inventories. Gas stocks - currently some 50% above the benchmark
five-year average levels - are still at their highest point for
this time of the year, reflecting low demand amid robust onshore
output. This has constantly pressured spot prices that slipped to a
10-year low in April.
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
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 like
Anadarko Petroleum Corporation
Devon Energy Corporation
Helmerich & Payne
Stockpiles held in underground storage in the lower 48 states
rose by 28 billion cubic feet (Bcf) for the week ended April 27,
2012, below the guidance range (of 30-34 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc
The increase - the seventh injection of 2012 - is lower than
both last year's build of 60 Bcf and the 5-year (2007-2011) average
addition of 79 Bcf for the reported week.
However, notwithstanding the relatively soft build during the
past week, the current storage level - at 2.576 trillion cubic feet
(Tcf) - is now up 840 Bcf (48.4%) from last year and 857 Bcf
(49.9%) over the five-year average.
Due to this huge natural gas surplus, inventories in underground
storage started to climb since March -- weeks earlier than the
usual summer stock-building season of April through October. They
have persistently exceeded the five-year average since late
September last year and are likely to test the nation's underground
storage facilities by fall. In fact, the EIA foresees natural gas
storage at record highs of 4.04 Tcf by October.
A supply glut has pressured natural gas prices during the past
year or so, as production from dense rock formations (shale) -
through novel techniques of horizontal drilling and hydraulic
fracturing - remain robust, thereby overwhelming demand.
Natural gas prices have dropped over 50% from 2011 peak of $4.92
per million Btu (MMBtu) in June to the current level of around
$2.30 (referring to spot prices at the Henry Hub, the benchmark
supply point in Louisiana). Incidentally, prices hit a 10-year low
of $1.82 last month.
To make matters worse, near-record mild weather across most of
the country curbed natural gas demand for heating all winter,
leading to an early beginning for the stock-building season. The
grossly oversupplied market continues to pressure commodity prices
in the backdrop of sustained strong production.
This has forced several natural gas players to announce
drilling/volume curtailments. Exploration and production outfits
Ultra Petroleum Corp.
Talisman Energy Inc.
) and Encana have all reduced their 2012 capital budget to minimize
investments in development drilling.
On the other hand, Oklahoma-based Chesapeake - the
second-largest U.S. producer of natural gas behind
Exxon Mobil Corp.
) - and rival explorer
) have opted for production shut-ins to cope with the weak
environment for natural gas that is likely to prevail during the
However, we feel these planned reductions will not be enough to
balance out the massive natural gas supply/demand disparity, and
therefore we do not expect much upside in gas prices in the near
term. In other words, there appears no reason to believe that the
supply overhang will subside and natural gas will be out of the
dumpster in 2012.
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