Gas Storage at New All-Time High

 
Last Thursday, we received a mildly bearish report from the federal government’s Energy Information Administration (EIA), showing a higher-than-expected rise in natural gas supplies. Stockpiles held in underground storage in the lower 48 states rose by 58 billion cubic feet (Bcf) for the week ended October 9.

This takes the current storage level to a new all-time high of 3.72 trillion cubic feet (Tcf), which is up 13.8% from last year's level and 14.6% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 450 Bcf above last year’s level and 474 Bcf above the five-year average. The inventory addition was lower than the five-year-average injection of 64 Bcf and last year's build of 81 Bcf.



The relentless increase in gas storage levels has meant that with three weeks remaining in the storage injection season, stockpiles are already 96% full. At this pace, by October 31, which is the end of the injection season, inventories could easily test the maximum capacity of 3.89 Tcf.

Despite the bearish EIA report, natural gas prices (we are referring to Henry Hub spot prices here) have edged up over the past few weeks, currently approaching $5.00 per million Btu (MMBtu), helped by indications of an economic rebound and expectations of a cold winter weather waiting just around the corner. Additionally, the presence of colder weather in early October (particularly in the Rocky Mountain region), have also helped support natural gas prices. However, prices are still way off the July 2008 highs, when they rallied to over $13 per MMBtu, before trending down to seven-year low level of sub-$2 per MMBtu recently.

Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity's current woes. Additionally, the Atlantic hurricane season did little to disrupt offshore production and onshore refineries.

But with U.S. natural gas fundamentals still remaining weak (storage levels are 15% above their five-year average), we are not fully convinced about the sustainability of the commodity’s current gains. This translates into limited upside for natural gas weighted companies and related support plays.
 
As a result, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO - Analyst Report), Chesapeake Energy (CHK - Analyst Report), EOG Resources (EOG - Analyst Report), Devon Energy Corp. (DVN - Analyst Report), EnCana Corp. (ECA - Analyst Report) and Anadarko Petroleum Corp. (APC - Analyst Report). We currently rate shares of these companies as Neutral.

We also maintain our Neutral recommendations for land drillers such as Nabors Industries (NBR - Analyst Report) and Patterson-UTI Energy (PTEN - Analyst Report), as well as natural gas-centric service providers such as BJ Services (BJS - Analyst Report), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

Oil majors like BP Plc (BP - Snapshot Report) – that have significant natural gas operations – are also expected to remain under pressure until pricing and demand improve further.