The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies on rising power sector demand.
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: A Smaller-than-Expected Rise in Storage
Stockpiles held in underground storage in the lower 48 states rose by 96 billion cubic feet (Bcf) for the week ended May 25, below the consensus market guidance of 100 Bcf gain.
The fifth injection of the 2018 refill season was also lower than the 5-year (2013-2017) average addition of 97 Bcf for the reported week though it exceeded last year's build of 80 Bcf. At 1.725 trillion cubic feet (Tcf) - natural gas inventories are 500 Bcf (22.5%) under the five-year average and 788 Bcf (31.4%) below the year-ago figure.
Fundamentally speaking, total supply of natural gas averaged around 86.6 Bcf per day, up by 1% on a weekly basis due to slight increase in production. Meanwhile, daily consumption remained essentially flat at 70.2 Bcf as increase in demand triggered by higher natural gas usage for power generation was offset by weaker residential/commercial demand.
In a boost to the commodity, warm weather in the South and Midwest increased natural gas demand for air conditioning by 7%. The higher electricity demand supported prices, which ended the week at $2.962 per MMBtu - just shy of the psychologically important $3 level.
Positive Long-Term Thesis
The fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.
The EIA predicts global demand for the commodity to grow from 340 Bcf per day in 2015 to 485 Bcf per day by 2040. Countries in Asia and in the Middle East - led by China's transition away from coal - will account for most of this increase.
And it will be the world's largest gas producer U.S., which will step up to meet this soaring demand. With domestic prices struggling to break the $3 per million Btu threshold, U.S. natural gas companies see a big opportunity in selling cheap U.S. production at higher prices to rest of the world. In fact, more than 50% of the domestic volume growth in the near future will be used for export in the form of liquefied natural gas (LNG). As per Paris-based International Energy Agency (IEA), the United States will vie with Australia and Qatar as the top LNG exporter by 2022.
New pipelines to Mexico, together with large-scale liquefied gas export facilities like Cheniere Energy, Inc.'s LNG Sabine Pass terminal and Dominion Energy Inc.'s D newly constructed Cove Point export plant, have meant that exports out of the U.S. are set for a quantum leap.
In fact, as per the Energy Department, gross liquefied natural gas exports are set to average 2.92 Bcf per day in 2018, increasing more than 50% from last year. Apart from the growing use of LNG and booming exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand with price eventually settling well above $3.
The perceived price strength augurs well for natural gas-heavy upstream companies like Cabot Oil & Gas Corporation COG , Chesapeake Energy Corporation CHK , Southwestern Energy Company SWN and WPX Energy, Inc. WPX .
Want to Own a Natural Gas Stock Now?
If you are looking for a near term natural gas play, Eclipse Resources Corporation ECR may be an excellent selection. This company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Eclipse Resources is engaged in the exploration and production of oil and natural gas properties in the Appalachian Basin, including the Utica and Marcellus Shales. The company's production consists of 72% natural gas. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 33% in the same period.
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