Gas Stocks Dip Below Year-Ago Level

The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies on account of slightly lower production. The storage withdrawal – the third for the winter heating season – has also pushed down natural gas stocks below the year-ago level for the first time since the week ended November 4, 2011.

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 Corp. (APC - Analyst Report), Chesapeake Energy (CHK - Analyst Report), Encana Corp. (ECA - Analyst Report), Devon Energy Corp. (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 fell by 73 billion cubic feet (Bcf) for the week ended November 30, 2012, higher than the guided range (of 64–68 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. (MHP).

The decrease represents the third withdrawal of the 2012-2013 winter heating season after stocks hit an all-time high in early November. More importantly, the weekly storage draw has overturned the excess stock over the year-ago period, while trimming the surplus relative to the five-year average benchmark.

As a result of the ‘better-than-expected’ draw during the past week, the current storage level – at 3.804 trillion cubic feet (Tcf) – is down 33 Bcf (0.9%) from the last year and just 168 Bcf (4.6%) over the five-year average.

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

In fact, natural gas inventories in underground storage have persistently exceeded the five-year average since late September last year and ended the usual summer stock-building season of April through October at a record 3.923 Tcf (as of October 31, 2012).

However, with the upcoming U.S. winter set to be colder than the unusually warm last one and domestic output likely to drop in 2013 versus 2012 on the back of natural gas players announcing drilling/volume curtailments, we might expect some balancing of the commodity’s supply/demand disparity.

This, in turn, could improve the prices and buoy natural gas producers like Ultra Petroleum Corp. (UPL - Analyst Report), Talisman Energy Inc. (TLM - Analyst Report), Encana and Chesapeake.

Zacks Rank

All the natural gas-associated companies mentioned above are Zacks #3 Rank (Hold) stocks, implying that these are expected to perform in line with the broader U.S. equity market over the next one to three months.