The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. Despite the bullish inventory news, natural gas prices dropped to levels not seen since 2012. With production remaining plentiful and expected to outpace demand for most of 2015, natural gas is likely to stay depressed for a while.
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 fell by 76 billion cubic feet (Bcf) for the week ended Dec 4, 2015, above the guided range (of 59-63 Bcf draw) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. The decrease was also higher than both last year's drop of 47 Bcf and the 5-year (2010-2014) average shrinkage of 65 Bcf for the reported week.
The past week's decline represents the second withdrawal of the 2015-2016 winter heating season after stocks hit an all-time high in November. But the current storage level - at 3.880 trillion cubic feet (Tcf) - is still up 514 Bcf (15.3%) from last year and is 236 Bcf (6.5%) above the five-year average.
Natural Gas Plunges Despite Encouraging Supply Data
Notwithstanding the more-than-expected decrease in storage, gas prices skidded 9% for the week to close at $1.990 per MMBtu on Friday, settling below the $2 level for the first time in over 3 years. The selloff spurred mainly by predictions of tepid early-December demand for the heating fuel due to mild weather spurred by the El Niño phenomenon.
Prices Likely to Remain Depressed
Natural gas prices are way off the heights reached some years back. From a peak of about $13.50 per MMBtu in 2008 to around $2 now, the plummeting value of natural gas represents a decline of around 85% over seven years.
With production from the major shale plays remaining strong and the commodity's demand failing to keep pace with this supply surge, natural gas prices have been held back.
Industrial requirement has been lackluster over the past few years with demand barely rising. What's more, natural gas demand by residential and commercial users has been weaker-than-expected over the past few weeks due to soft temperatures.
In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete.
The price weakness translates into limited upside for natural gas-weighted companies including the likes of Range Resources Corp. RRC , Southwestern Energy Co. SWN , Cabot Oil & Gas Corp. COG , Rice Energy Inc. RICE , Cimarex Energy Co. XEC and Eclipse Resources Corp. ECR . Each of them carry a Zacks Rank #3 (Hold), which means that investors should rather wait for a better entry point before accumulating shares of these companies.