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The U.S. Energy Department's weekly inventory release showed an in-line rise in natural gas supplies, as the commodity’s brisk use for power generation in the face of summer temperatures were offset by strong production growth. However, on a bearish note, the build was 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 72 billion cubic feet (Bcf) for the week ended Jun 28, 2013, within the guided range (of 70–74 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI - Analyst Report). But the increase – the twelfth injection of 2013 – exceeded both last year’s build of 41 Bcf and the 5-year (2008–2012) average addition of 71 Bcf for the reported week.

Despite past week’s build, the current storage level – at 2.605 trillion cubic feet (Tcf) – is down 491 Bcf (15.9%) from the last year and is 30 Bcf (1.1%) 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.

Following this, natural gas demand went through a lean period, with the end of the winter heating season and ahead of the peak cooling loads for summer. In this timeframe, the commodity experienced a number of above-average builds, thereby pulling down prices again.

Outlook

With hot weather expected to prevail over the country during the next few weeks, leading to strong electricity draws to run air conditioners, the commodity’s price may experience another upward curve.

This, in turn, is expected to buoy natural gas producers, particularly low cost suppliers like Ultra Petroleum Corp. (UPL - Analyst Report), and big players including Chesapeake Energy Corp. (CHK - Analyst Report) and Exxon Mobil Corp. (XOM - Analyst Report)

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 respective Zacks Ranks.

As of now, Ultra Petroleum and Exxon Mobil are Zacks Rank #3 (Hold) stocks, while Chesapeake currently retains a Zacks Rank #2 (Buy).
 

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