Natural gas spot prices tumbled to below $3.50 per million Btu (MMBtu) on Thursday, Oct 3, following the U.S. Energy Department's weekly inventory release that showed a larger-than-expected rise in the commodity’s supplies. On a further bearish note, the storage build was also higher than the benchmark 5-year average gain for the week.
Mild weather forecasts – which could slow demand even more – further worsened the situation. However, natural gas ended slightly higher Friday (at $3.51 per MMBtu), as investors closely tracked the development of a tropical storm activity in the Gulf of Mexico that could disrupt production from the energy-rich region.
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 101 billion cubic feet (Bcf) for the week ended Sep 27, 2013, higher than the guided range (of 93–97 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI - Analyst Report). The increase – the twenty-fifth injection of 2013 – also exceeded both last year’s build of 77 Bcf and the 5-year (2008–2012) average addition of 82 Bcf for the reported week.
Following past week’s build, the current storage level – at 3.487 trillion cubic feet (Tcf) – is now 49 Bcf (1.4%) above the 5-year average. However, supplies are still down 155 Bcf (4.3%) 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 Carrizo Oil & Gas Inc. (CRZO - Snapshot Report). This Zacks Rank #2 (Buy), small, inexpensive natural gas producer has seen its share price almost double since the start of 2013. Despite this price appreciation, we remain optimistic on the firm’s near-term prospects, supported by its exposure to the high-return shale plays, as well as the company’s above-average production growth.