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The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. Despite this drawdown, gas stocks continue to remain bloated, reflecting low demand amid robust onshore output.

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.

Analysis of the Data

Stockpiles held in underground storage in the lower 48 states fell by 148 billion cubic feet (Bcf) for the week ended January 11, 2013, higher than the guided range (of 137–141 Bcf drawdown) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. .

The decrease represents the eighth withdrawal of the 2012-2013 winter heating season after stocks hit an all-time high in early November. Moreover, the draw was higher than both the last year’s withdrawal of 89 Bcf and the five-year (2008–2012) average reduction of 144 Bcf for the reported week.

As a result of the ‘better-than-expected’ draw during the past week, the current storage level – at 3.168 trillion cubic feet (Tcf) – is down 147 Bcf (4.4%) from the last year though it is still 316 Bcf (11.1%) above the five-year average.

In fact, natural gas inventories in underground storage have persistently exceeded the five-year average since late September 2011 and ended the usual summer stock-building season of April through October at a record 3.923 Tcf (as of October 31, 2012).

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

However, with the U.S. winter set to be colder than the unusually warm last one, we might expect some balancing of the commodity’s supply/demand disparity on the back of its more normalized use for space heating by residential/commercial consumers.

This, in turn, could improve the prices and buoy natural gas producers, particularly smaller players like Linn Energy LLC (LINE - Snapshot Report), EXCO Resources Inc. (XCO - Snapshot Report) and Forest Oil Corp. (FST - Analyst Report). With an improvement in the companies’ ability to generate positive earnings surprises, they can then move higher from their current Zacks Rank #3 (Hold).
 

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