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The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies, as domestic consumption – reflecting air conditioning demand – declined with temperatures falling from their summer highs. Additionally, production level remained strong.

Gas stocks – currently some 10% above the benchmark 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.

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 80 billion cubic feet (Bcf) for the week ended September 21, 2012, higher than the guided range (of 74–78 Bcf gain) as per the analysts surveyed by Platts – the energy information arm of McGraw-Hill Companies Inc. .

The increase also exceeded the five-year (2007–2011) average addition of 76 Bcf for the reported week but was below the last year’s build of 104 Bcf.

Following past week’s build, the current storage level – at 3.576 trillion cubic feet (Tcf) – is up 296 Bcf (9.0%) from the last year and 282 Bcf (8.6%) 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 parts 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, repeated smaller-than-average storage builds have rallied back prices above the $3.00 per MMBtu threshold. 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.

But with temperatures falling from their summer highs and consequent cooling demand set to wane, bigger storage builds are likely to prevail in the near future.

Moreover, there are apprehensions that should natural gas stay over the $3.00 per MMBtu barrier, utilities that took advantage of the beaten down prices to switch to the commodity from the more costly coal, could revert back to the latter. This demand loss may further inflate natural gas inventories.

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