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The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies, reflecting the commodity’s tepid use for power generation, as temperatures fell from their summer highs. Moreover, the build came in ahead of the five-year average addition for the week.

The latest injection – the 24th in 2012 – has added to already bloated inventories. Gas stocks – currently some 15% above the benchmark levels – are at their highest point during this time of the year, reflecting low demand amid robust onshore output. This has constantly exerted pressure on spot prices that slipped to a 10-year low in April.

In addition to natural gas inventories being at elevated levels, the most recent injection marks the first instance since late April, when the supply build has exceeded the average for this time, expanding 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 66 billion cubic feet (Bcf) for the week ended August 24, 2012, higher than the guidance range (of 58–60 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. .

The increase was also higher than both last year’s build of 60 Bcf and the five-year (2007–2011) average addition of 62 Bcf for the reported week, thereby widening the surplus relative to the benchmarks.

As a result of the ‘above-average’ build during the past week, the current storage level – at 3.374 trillion cubic feet (Tcf) – is up 429 Bcf (14.6%) from the last year and 361 Bcf (12.0%) over the five-year average. In fact, the latest inventory addition snaps a string of smaller-than-average storage builds (since the week ended April 27, to be precise).

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 dive approximately 63% from the 2011 peak of $4.92 per million Btu (MMBtu) in June to a 10-year low of $1.82 per MMBtu during late April 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

However, in the recent past (from the week ended April 27 to the week ended August 17), repeated smaller-than-average storage builds have rallied back prices toward $3.00 per MMBtu. This can be attributed to strong demand by the utilities, as beaten down prices of natural gas convinced them to switch to the commodity from the more costly coal.

As hot summer weather prevailed across the country over the past two months, homes and businesses were prompted to increase electricity draws to run air conditioners.

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