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The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies that took inventories below their five-year average. However, unfavorable weather forecasts and strength in the commodity’s production, induced a big drop in 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 Smaller-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 42 billion cubic feet (Bcf) for the week ended Sep 29, 2017, below the guidance (of 47 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

Moreover, the increase was lower than both last year’s addition of 76 Bcf and the 5-year (2012-2016) average net injection of 91 Bcf for the reported week. This caused the current storage level – at 3.508 trillion cubic feet (Tcf) – fall below the five-year average for the first time since January. Stocks are now 8 Bcf (0.2%) under the five-year average, while dropping 161 Bcf (4.4%) below the year-ago figure.

Fundamentally speaking, supply remained essentially unchanged on a weekly basis at 79.7 Bcf per day, while daily natural gas consumption decreased 13.3% to 64.7 Bcf. The flattish supply could be attributed to stagnant dry natural gas production.

On the demand side, the fall was triggered by sharply lower power consumption that tumbled 24.2% week over week on the back of cooler temperatures. A more than 12% dip in residential/commercial consumption further dented demand.

Futures End Down Despite Bullish EIA Data

Shrugging off EIA’s latest commentary, natural gas prices went down 4.8% last week to settle at $2.863 per MMBtu on Friday as investors chose to concentrate on mild temperature predictions (translating into easing cooling gas demand) over the next few days. Prices were further dented by the continued strength in dry gas production, which are hovering near record levels.

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, PetroQuest Energy Inc. (PQ - 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 Lafayette, LA, PetroQuest is an independent explorer and producer with primary operations in Texas and the Gulf Coast Basin and Oklahoma. The 2017 Zacks Consensus Estimate for this company is a loss of 66 cents, some 78.2% narrower than 2016. Next year’s average forecast is a loss of 26 cents, pointing to another 60.8% improvement, riding on strong production.

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