The U.S. Energy Department's weekly inventory release showed a much smaller-than-expected increase in natural gas supplies, which catapulted the commodity to a more than two-month high.
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: Less-than-Expected Rise in Storage
Stockpiles held in underground storage in the lower 48 states rose by 2 billion cubic feet (Bcf) for the week ended Mar 31, 2017, below the guidance (of 10 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. The miniscule build in natural gas inventories helped the commodity to end Friday at $3.331 per MMBtu – the highest close since Jan 27.
However, a bout of warmer temperatures in major heating demand regions meant that the increase compared unfavorably with the 5-year (2012–2016) average shrinkage of 13 Bcf for the reported week though it was below last year’s addition of 6 Bcf.
Following the small climb during the final storage week of the 2016-2017 winter heating season, the current storage level – at 2.051 trillion cubic feet (Tcf) – is down 427 Bcf (17.2%) from last year but is 265 Bcf (14.8%) above the five-year average.
Positive Long-Term Thesis
With the winter heating period – which runs from Nov 1 to Mar 31 – coming to an end and the injection season taking off, the nation’s gas usage is likely to hit a low on the back of mild spring temperatures. The demand situation is expected to improve once warm weather sets in and gas-fired electricity generation for air conditioning need picks up.
In any case, long-term fundamentals for the commodity continue to be bullish on the back of structural imbalances. While domestic natural gas production is expected to rebound this year, the growing use of liquefied natural gas (or LNG), booming exports to Mexico, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output. The resulting effect will ensure natural gas storage keeping pace with the 5-year average in the near future, with deficits piling up later on.
By the onset of summer months, these secular headwinds will start to have a positive impact on natural gas sentiment and price.
Stocks to Bet On
The perceived price strength augurs well for natural gas-heavy upstream companies like Rice Energy Inc. , Chesapeake Energy Corp. (CHK - Free Report) , Southwestern Energy Co. (SWN - Free Report) , WPX Energy Inc. (WPX - Free Report) , Cabot Oil & Gas Corp. (COG - Free Report) and EQT Corp. (EQT - 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 natural gas names for your portfolio, one could opt for Antero Resources Corp. (AR - Free Report) . It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Founded in 2002, Denver, CO-based Antero Resources is an independent oil and natural gas company with focus on liquids-rich natural gas in the Appalachian Basin in West Virginia, Ohio and Pennsylvania. The company has an excellent earnings surprise history. It surpassed estimates in each of the last four quarters at an average rate of 239.10%.
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