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The U.S. Energy Department's weekly inventory release showed a larger-than-expected rise in natural gas supplies on account of weak demand. On a further 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 67 billion cubic feet (Bcf) for the week ended Aug 23, 2013, higher than the guided range (of 61–65 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI - Analyst Report). The increase – the twentieth injection of 2013 – also exceeded both last year’s build of 64 Bcf and the 5-year (2008–2012) average addition of 66 Bcf for the reported week.

Following past week’s build, the current storage level – at 3.130 trillion cubic feet (Tcf) – is now 45 Bcf (1.5%) above the 5-year average. However, supplies are still down 235 Bcf (7.0%) 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.

Outlook

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.

With more moderate weather expected during the next few weeks, leading to reduced power demand, natural gas price may experience another downward curve. This, in turn, is expected to pull down natural gas producers, particularly small ones.

Considering the turbulent market dynamics of the natural gas industry, we advocate big, relatively low-risk names like Exxon Mobil Corp. (XOM - Analyst Report) and Chesapeake Energy Corp. (CHK - Analyst Report) – both Zacks Rank #3 (Hold) stocks.

However, one company that stands out is Range Resources Corp. (RRC - Analyst Report). This Zacks Rank #1 (Strong Buy) independent natural gas producer has been one of the better performing S&P stocks since the start of 2013, gaining 20% during the period. Most of the gains have been driven by its exposure to the high-return Marcellus Shale play, as well as the company’s above-average production growth.

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