The U.S. Energy Department's weekly inventory release showed a smaller-than-expected rise in natural gas supplies due to the commodity’s brisk use for power generation in the face of warmer weather. However, on a bearish note, the storage build was bigger than the benchmark 5-year average gain for the week.
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 57 billion cubic feet (Bcf) for the week ended Aug 16, 2013, below the guided range (of 67–71 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI - Analyst Report). However, the increase – the nineteenth injection of 2013 – exceeded both last year’s build of 47 Bcf and the 5-year (2008–2012) average addition of 56 Bcf for the reported week.
Following past week’s build, the current storage level – at 3.063 trillion cubic feet (Tcf) – is now 44 Bcf (1.5%) above the 5-year average. However, supplies are still down 238 Bcf (7.2%) from the last year’s level.
Natural gas stocks hit an all-time high of 3.929 Tcf in 2012, 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 started to look up in 2013. 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 was gone, thereby driving commodity prices to around $4.40 per MMBtu in Apr – the highest in 21 months.
During the last few weeks, though, natural gas demand has gone through a relatively lean period, as mild weather – from July through mid-August – prevailed over the country, leading to tepid electricity draws to run air conditioners. This has led to a slide in the commodity’s price. In fact, healthy injections over last few weeks, plus strong production have meant that supplies have overturned the deficit over the five-year average for the first time since late March.
But with hotter-than-normal weather expected during the next few weeks, leading to strong electricity draws to run air conditioners, natural gas price may experience another upward curve.
This, in turn, is expected to buoy natural gas producers, particularly small ones like Carrizo Oil & Gas Inc. (CRZO - Snapshot Report). While big players like Exxon Mobil Corp. (XOM - Analyst Report) and Southwestern Energy Co. (SWN - Analyst Report) – both Zacks Rank #3 (Hold) stocks – would also benefit from the improved fundamentals, they are large-cap, low-beta entities with slow price action.
As such, we advise investors to accumulate Carrizo shares, which sports a Zacks Rank #1 (Strong Buy). With the financial incentive to produce the commodity and the subsequent improvement in the company’s ability to generate positive earnings surprises, it has the potential to rise significantly from current levels.