The U.S. Energy Department's weekly inventory release showed a larger-than-expected rise in natural gas supplies on account of weak demand due to mild summer temperatures. Moreover, on a further bearish note, the build was well ahead of the five-year average levels, thereby narrowing the deficit with the benchmark.
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 rose by 95 billion cubic feet (Bcf) for the week ended Jun 21, 2013, higher than the guided range (of 88-92 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. ( MHFI ). The increase - the eleventh injection of 2013 - also exceeded both last year's build of 58 Bcf and the 5-year (2008-2012) average addition of 79 Bcf for the reported week.
Despite past week's large build, the current storage level - at 2.533 trillion cubic feet (Tcf) - is down 522 Bcf (17.1%) from the last year and is 31 Bcf (1.2%) below the benchmark five-year average.
Natural gas stocks hit an all-time high of 3.929 Tcf last year, 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 have started to look up in recent times. 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 has now gone, thereby driving commodity prices to around $4.40 per MMBtu in Apr - the highest in 21 months.
This, in turn, is expected to buoy natural gas producers, particularly smaller players like Quicksilver Resources Inc. ( KWK ), WPX Energy Inc. ( WPX ) and Forest Oil Corp. ( FST ). With the financial incentive to produce the commodity and the subsequent improvement in the companies' ability to generate positive earnings surprises, they are likely to move higher from their current Zacks Rank #3 (Hold).
But natural gas demand is currently going through a lean period - with a tepid start to summer that is yet to see the usual cooling loads during this time of the year. Therefore, until hot summer weather prevails across the country and increases electricity draws to run air conditioners, the commodity may experience above-average builds, thereby pulling down prices again.