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The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies on the back of increased power sector consumption. 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 171 billion cubic feet (Bcf) for the week ended Feb 22, 2013, higher than the guided range (of 166–170 Bcf drawdown) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. .

The decrease represents the fourteenth withdrawal of the 2012-2013 winter heating season after stocks hit an all-time high in early November last year. Moreover, the draw was higher than both the last year’s withdrawal of 106 Bcf and the five-year (2008–2012) average reduction of 118 Bcf for the reported week.

Following the past week’s reduction, the current storage level – at 2.229 trillion cubic feet (Tcf) – is down 307 Bcf (12.1%) from the last year but is still 308 Bcf (16.0%) 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 Oct 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 Quicksilver Resources Inc. (KWK - Analyst Report), WPX Energy Inc. (WPX - 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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