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The U.S. Energy Department's weekly inventory release showed an in-line increase in natural gas supplies following which the commodity traded up. However, worries over the fuel’s tepid demand on the back of bearish weather predictions and Tropical Storm Harvey-related power outages offset the gains and pushed down natural gas prices to week-ago levels.

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: In-Line Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 43 billion cubic feet (Bcf) for the week ended Aug 18, 2017, within the guided range (of 39–50 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

While the increase was higher than last year’s addition of 12 Bcf, it was well under the 5-year (2012-2016) average injection of 53 Bcf for the reported week. This caused the current storage level – at 3.125 trillion cubic feet (Tcf) – narrow its surplus to the five-year average to 45 Bcf (1.5%). Meanwhile, total stocks are 223 Bcf (6.7%) lower than last year’s levels at this time. The supportive data prompted natural gas prices to climb 2.1 cents (or 0.7%) to $2.949 per MMBtu on Thursday.  

Prices Suffer from Harvey Impact

Eventually, the commodity ended the week at $2.892 per MMBtu, essentially unchanged for the period as the initial optimism over a modest storage addition was offset by weather and Tropical Storm Harvey-related worries.

Firstly, the electricity generation fuel sold off as investors took note of cooler weather predictions (translating into tepid heating gas demand) for the week ahead. Natural gas was also down on concerns of depressed power and manufacturing sector demands due to temporary electricity outages for the next several days caused by Tropical Storm Harvey. 

However, with the big storm playing havoc with around 23% of total Gulf natural gas output and half of the nation’s gas processing plant capacity, the commodity’s price is set for a spike on supply disruptions.

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 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 48 cents, representing some 1,492.3% earnings per share growth over 2016. Next year’s average forecast is 65 cents, pointing to another 36.6% growth.

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