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The U.S. Energy Department's weekly inventory release showed an above-average increase in natural gas supplies. The bearish data, together with unfavorable weather forecasts and strength in the commodity’s production, weighed on prices.

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 97 billion cubic feet (Bcf) for the week ended Sep 15, 2017, above the guidance (of 89 Bcf gain) as per the expectations from analysts and traders.

Worse, the increase was higher than both last year’s addition of 54 Bcf and the 5-year (2012-2016) average net injection of 73 Bcf for the reported week. This caused the current storage level – at 3.408 trillion cubic feet (Tcf) – to widen its surplus to the five-year average to 67 Bcf (2%), while stocks are still 136 Bcf (3.8%) below the year-ago figure.

Fundamentally speaking, supply edged up 1.4% to 80.2 Bcf per day, while daily natural gas consumption jumped 11.3% to 71.1 Bcf. The slight increase in supply could be attributed to growth in dry natural gas production and Canadian imports. On the demand side, the healthy improvement was triggered by hot weather in the East and sharply higher power consumption in Florida as demand returned to pre-Irma levels.

Futures End Down After Bearish EIA Data

Following EIA’s latest commentary, natural gas prices fell 2.2% last week to settle at $2.959 per MMBtu on Friday. Investors also chose to concentrate on cooler-than-normal weather predictions (translating into lower cooling gas demand) over the next few days. Prices were further dented by expanding dry gas production.

Positive Long-Term Thesis

Despite occasional hiccups, 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 looking for a near term natural gas play, W&T Offshore Inc. (WTI - Free Report) may be a good selection. This company actually has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Houston, TX, W&T Offshore is an independent explorer and producer with primary operations in the U.S. Gulf of Mexico. W&T Offshore has an excellent earnings surprise history. With phenomenal drilling success in its high value deepwater exploration projects, the company has a 100% track of outperforming estimates over the last four quarters at an impressive average rate of 586.7%.

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