The U.S. Energy Department's weekly inventory release showed a
smaller-than-expected rise in natural gas supplies due to the
commodity's brisk use for power generation in the face of warmer
weather. However, on a bearish note, the storage build was bigger
than the benchmark 5-year average gain for the week.
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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
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 57 billion cubic feet (Bcf) for the week ended Aug 16,
2013, below the guided range (of 67-71 Bcf gain) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Financial Inc.
). However, the increase - the nineteenth injection of 2013 -
exceeded both last year's build of 47 Bcf and the 5-year
(2008-2012) average addition of 56 Bcf for the reported week.
Following past week's build, the current storage level - at 3.063
trillion cubic feet (Tcf) - is now 44 Bcf (1.5%) above the 5-year
average. However, supplies are still down 238 Bcf (7.2%) 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.
During the last few weeks, though, natural gas demand has gone
through a relatively lean period, as mild weather - from July
through mid-August - prevailed over the country, leading to tepid
electricity draws to run air conditioners. This has led to a
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.
But with hotter-than-normal weather expected during the
next few weeks, leading to strong electricity draws to run air
conditioners, natural gas price may experience another upward
This, in turn, is expected to buoy natural gas producers,
particularly small ones like
Carrizo Oil & Gas Inc.
). While big players like
Exxon Mobil Corp.
Southwestern Energy Co.
) - both Zacks Rank #3 (Hold) stocks - would also benefit
from the improved fundamentals, they are large-cap, low-beta
entities with slow price action.
As such, we advise investors to accumulate Carrizo shares, which
sports a Zacks Rank #1 (Strong Buy). With the financial incentive
to produce the commodity and the subsequent improvement in the
company's ability to generate positive earnings surprises, it has
the potential to rise significantly from current levels.