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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 in the face of extreme summer temperatures.

Despite the relatively soft (and below estimate) supply build, the latest injection – the twenty first in 2012 – has added to already bloated inventories. Gas stocks – currently some 15% above the benchmark 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, injections since late April have been 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 - Analyst Report), 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 24 billion cubic feet (Bcf) for the week ended August 3, 2012, lower the guidance range (of 27–31 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 31 Bcf and the 5-year (2007–2011) average addition of 45 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 3.241 trillion cubic feet (Tcf) – is still up 465 Bcf (16.8%) from last year and 386 Bcf (13.5%) 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 around 4.0 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.

To make matters worse, near-record mild winter weather across most of the country curbed natural gas demand for heating, 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 prompted natural gas prices to drop approximately 63% from 2011 peak of $4.92 per million Btu (MMBtu) in June to a 10-year low of $1.82 during late April 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).  

However, in the recent past (since the week ended April 27, to be precise), repeated smaller-than-average storage builds have rallied back prices towards $3.00 per MMBtu. This can be attributed to strong demand by the utilities, as beaten down prices of natural gas have convinced them to switch to the commodity from the more costly coal.

With hot summer weather prevailing across the country over the past two months, homes and businesses have been prompted to increase electricity draws to run air conditioners.

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