Back to top

Analyst Blog

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies, reflecting the commodity’s brisk use for power generation. 

Despite the relatively soft (and below estimate) supply build, the latest injection – the thirteenth in 2012 – has added to already bloated inventories. Gas stocks – currently some 30% above the benchmark five-year average levels – are at their highest point for this time of the year, reflecting low demand amid robust onshore output. This has constantly pressured spot prices that slipped to a 10-year low in April.

While natural gas inventories are no doubt still at elevated levels, the most recent build was significantly lower than the average for this time, cutting the surplus relative to last year and the five-year average.

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 like Anadarko Petroleum Corporation (APC - Analyst Report), Chesapeake Energy (CHK - Analyst Report), Encana Corporation (ECA - Analyst Report), Devon Energy Corporation (DVN - Analyst Report), Nabors Industries (NBR), Patterson-UTI Energy (PTEN - Analyst Report), Helmerich & Payne (HP - Analyst Report) and Halliburton Company (HAL - Analyst Report).

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 June 8, 2012, below the guidance range (of 71–75 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc .

The increase was also lower than both last year’s build of 72 Bcf and the 5-year (2007–2011) average addition of 88 Bcf for the reported week, thereby trimming the surplus relative to the benchmarks.

But in spite of the ‘below-average’ build during the past week, the current storage level – at 2.944 trillion cubic feet (Tcf) – is still up 708 Bcf (31.7%) from last year and 666 Bcf (29.2%) over the five-year average.

Due to this huge natural gas surplus, inventories in underground storage started to climb since March – weeks earlier than the usual summer stock-building season of April through October. They have persistently exceeded the five-year average since late September last year and are likely to test the nation’s underground storage facilities by fall. In fact, the EIA foresees natural gas storage at record highs of 4.02 Tcf by October end.

A supply glut has pressured natural gas prices during the past year or so, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remain robust, thereby overwhelming demand.

Natural gas prices have dropped approximately 50% from 2011 peak of $4.92 per million Btu (MMBtu) in June to the current level of around $2.50 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana). Incidentally, prices hit a 10-year low of $1.82 during late April.

To make matters worse, near-record mild weather across most of the country curbed natural gas demand for heating all winter, leading to an early beginning for the stock-building season. The grossly oversupplied market continues to pressure commodity prices in the backdrop of sustained strong production.

This has forced several natural gas players to announce drilling/volume curtailments. Exploration and production outfits like Ultra Petroleum Corp. (UPL - Analyst Report), Talisman Energy Inc. (TLM - Analyst Report) and Encana have all reduced their 2012 capital budget to minimize investments in development drilling.

On the other hand, Oklahoma-based Chesapeake – the second-largest U.S. producer of natural gas behind Exxon Mobil Corp. (XOM - Analyst Report) – and rival explorer ConocoPhillips (COP - Analyst Report) have opted for production shut-ins to cope with the weak environment for natural gas that is likely to prevail during the year.

However, we feel these planned reductions will not be enough to balance out the massive natural gas supply/demand disparity, and therefore we do not expect much upside in gas prices in the near term. In other words, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumpster in 2012.

Please login to Zacks.com or register to post a comment.