Natural gas spot prices rallied to $3.72 per million Btu (MMBtu) on Thursday, Sep 19 – the highest in two months – following the U.S. Energy Department's weekly inventory release that showed a smaller-than-expected rise in the commodity’s supplies.
On a further bullish note, the storage build was also lower than the benchmark 5-year average gain for the week. However, natural gas ended slightly lower Friday (at $3.69 per MMBtu) on profit taking and mild weather forecasts.
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 46 billion cubic feet (Bcf) for the week ended Sep 13, 2013, below the guided range (of 55–59 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI - Analyst Report). Moreover, the increase – the twenty-third injection of 2013 – was lower than both last year’s build of 61 Bcf and the 5-year (2008–2012) average addition of 74 Bcf for the reported week.
Despite past week’s modest build, the current storage level – at 3.299 trillion cubic feet (Tcf) – is still 18 Bcf (0.5%) above the 5-year average. However, supplies are down 187 Bcf (5.4%) 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.
However, with 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 more than 25% during the period. Despite this price appreciation, we remain optimistic on the firm’s near-term prospects, supported by its exposure to the high-return Marcellus Shale play, as well as the company’s above-average production growth.