The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. However, the build was well below historical averages for the sixth week in a row, which further narrowed the supply overhang. This, together with predictions of above-normal temperatures across the country in the near term - leading to the commodity's heightened requirement for air conditioning - pushed natural gas futures to a 9-month high.
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: Larger-than-Expected Injection
Stockpiles held in underground storage in the lower 48 states rose by 69 billion cubic feet (Bcf) for the week ended June 10, 2016, above the guidance (of 64 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.
Following past week's numbers, the current storage level - at 3.041 trillion cubic feet (Tcf) - is now up 633 Bcf (26%) from last year and is sitting 704 Bcf (30%) above the five-year average.
However, on a positive note, the latest increase was lower than both last year's build of 96 Bcf and the 5-year (2011-2015) average addition of 87 Bcf for the reported week.
Natural Gas Prices Rally
Natural gas prices ended Friday at $2.623 per MMBtu, 2.6% higher from last week as successive below-average builds on the back of strong power sector consumption keep on cutting into the year-over-year storage surplus. Things were further helped by predictions of strong cooling demand with forecasts of warmer temperature across the country over the next few days.
The commodity has rebounded strongly (by more than 60%) since hitting 17-year lows of around $1.6 per MMBtu in the first quarter. This has boosted shares of natural gas companies like Devon Energy Corp. DVN and Range Resources Corp. RRC , which have popped up more than 30% over the past 3 months.
Are Prices Set to Explode?
The phenomenal run up notwithstanding, 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 $2.60 now, the plummeting value of natural gas represents a decline of 80% over 8 years.
However, significantly lower year-over-year injection figures this time has meant that the commodity has now crossed the key psychological level of $2.50 per MMBtu. This might just support a price breakout in the coming weeks.
With production from the major shale plays starting to ease and the commodity's demand set to increase with the onset of a 'hot' summer, natural gas prices will continue to recover. What's more, rig count has been falling consistently and is now languishing at 86 - compared to more than 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.
The price strength translates into upside for natural gas-weighted companies including the likes of Cimarex Energy Co. XEC , EQT Corp. EQT , Southwestern Energy Co. SWN , Cabot Oil & Gas Corp. COG and Williams Companies Inc. WMB .