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Natural Gas Futures Rally on Bullish Stockpile Draw

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The U.S. Energy Department's weekly inventory release showed a big decrease in natural gas supplies – the season’s eighth successive withdrawal.

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: A Hefty Draw

Stockpiles held in underground storage in the lower 48 states fell by 151 billion cubic feet (Bcf) for the week ended Jan 6, 2017, comfortably above the guidance (of 137 Bcf draw) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

Following the massive withdrawal, the current storage level – at 3.160 trillion cubic feet (Tcf) – is down 363 Bcf (10%) from last year and 4 Bcf (0.1%) below the five-year average.

Buoyed by the inventory draw, natural gas prices traded up 4.1% for the week to end Friday at $3.419 per MMBtu.

The past week’s decline represents the eighth successive withdrawal of the 2016-2017 winter heating season after stocks hit an all-time high in November. However, the decrease lagged both last year’s drop of 152 Bcf and the 5-year (2012–2016) average shrinkage of 167 Bcf for the reported week.

Long-Term Thesis Positive

Successive below-average builds in the recent past and now some big draws – with strong power sector consumption – has meant that the storage surplus has now turned into deficit. As a result, natural gas prices have rebounded strongly and more than doubled from the extreme lows it hit in March 2016. The dramatic recovery has helped the commodity stay above the key psychological level of $3 per MMBtu.

With winter turning out cooler than expected, natural gas demand has picked up on the back of elevated power sector consumption due to space heating use. What’s more, the heating fuel is set to rise further with lower-than-normal temperature predictions over more than half of U.S. for the next two weeks.

Currently at around 3.4 per MMBtu, prices look set to break the $4 barrier if inventories continue to fall. In general, sentiment toward natural gas is likely to become more positive in the near future as speculators bet on a long and chilly winter.

The price strength augurs well for natural gas drillers like Rice Energy Inc. , Cimarex Energy Co. , Southwestern Energy Co. (SWN - Free Report) , Gulfport Energy Corp. (GPOR - Free Report) and Devon Energy Corp. (DVN - Free Report) .

However, each of these firms has a Zacks Rank #3 (Hold), which does not make them screaming buys.

In case you are looking for energy names for your portfolio, one could opt for Abraxas Petroleum Corp. (AXAS - Free Report) . It has a Zacks Rank #1 (Strong Buy). Shares of Abraxas Petroleum surged nearly 133% over the past six months, significantly outpacing the 15% gain for the Zacks categorized Oil and Gas - Exploration and Production – U.S. industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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