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The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. Adding to the bearish sentiment, the build outpaced the five-year average for the first time in six weeks.

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 Larger-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 53 billion cubic feet (Bcf) for the week ended Aug 11, 2017, above the guidance (of 47 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

Worse, the increase was higher than both last year’s build of 23 Bcf and the five-year (2012–2016) average addition of 50 Bcf for the reported week. Following past week’s climb, the current storage level – at 3.082 trillion cubic feet (Tcf) – is now 55 Bcf (1.8%) above the five-year average although stocks are 254 Bcf (7.6%) lower than the year-ago figure.

The above-average build in natural gas inventories – first in six weeks – initially instilled pessimism and prompted spurts of selling.

Storage Revision Comes to the Rescue

However, natural gas futures actually rose later that day to finish Thursday at $2.929 per MMBtu, up 3.9 cents (or 1.4%) from Wednesday’s close. The trigger to the rally was EIA’s bullish stocks data revisions for the weeks ending Jun 30 through Aug 4 associated with the reclassification from working gas to base gas. More than offsetting the effects of the bearish inventory report on prices, the revisions cut stocks for the week ended Aug 4 by 9 Bcf from EIA’s previous estimates.

Still, Prices Fell for the Week

Notwithstanding the positive revisions by the EIA, natural gas slumped around 3% for the week to end Friday at $2.8933 per MMBtu as investors were keen to book profits after surges over the prior two weeks.

Positive Long-Term Thesis

Despite occasional hiccups, the natural gas demand situation looks promising with warmer-than-average conditions set to prevail in most U.S. pockets over the next few days and power generators burning more gas to meet intensifying cooling demand. However, there are apprehensions that the peak summer demand will begin to recede within the next few weeks.  

In any case, long-term fundamentals for the commodity continue to be supportive 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 LNG and Mexican exports, 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 five-year average in the near future, with deficits piling up later on. Over time, these secular tailwinds are likely to support natural gas sentiment and price.

The perceived price strength augurs well for natural gas-heavy upstream companies like Rice Energy Inc. (RICE - Free Report) , 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) .

As of now, we expect the fuel to continue to be range bound around $3 with little chance of any drastic increase.

Want to Own a Natural Gas Stock Now?

If you are still looking for a near term natural gas play, Range Resources Corp. (RRC - Free Report) may be a good selection. This company actually has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S. The 2017 Zacks Consensus Estimate for this company is 51 cents, representing some 1,611.9% earnings per share growth over 2016. Next year’s average forecast is 72 cents, pointing to another 39.4% growth. Range Resources has a VGM Score of “B.”

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