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Natural Gas Plunges on Weather Worries, Strong Production

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The U.S. Energy Department's weekly inventory release showed a below-average decrease in natural gas supplies. Unfavorable weather forecasts and strength in the commodity’s production added to the bearish sentiment, bringing prices down sharply.

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-Average Draw

Stockpiles held in underground storage in the lower 48 states fell by 69 billion cubic feet (Bcf) for the week ended Dec 8, above the guidance (of 63 Bcf decline) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

However, the decrease was lower than both last year’s drop of 132 Bcf and the five-year (2012-2016) average net shrinkage of 78 Bcf for the reported week. Following the past week’s decline – the fourth withdrawal of the 2017-2018 winter heating season – the current storage level now stands at 3.626 trillion cubic feet (Tcf) - 27 Bcf (0.7%) under the five-year average and 201 Bcf (5.3%) below the year-ago figure.

Fundamentally speaking, total supply of natural gas averaged around 82 Bcf per day, essentially flat on a weekly basis due to steady production. Meanwhile, daily natural gas consumption jumped 25.1% to 106.7 Bcf. The sharp increase in demand was triggered by a 49.6% surge in residential/commercial consumption on the back of cooler temperatures. Moreover, natural gas consumption for power generation was up by 18% from the previous week.

Futures Slump Following EIA Data

Following EIA’s latest commentary, natural gas prices slumped around 5.8% last week to settle at $2.612 per MMBtu on Friday. Apart from the below-average draw, investors were spooked by expanding dry gas production and forecasts of tepid heating demand from another relatively warm winter.

Positive Long-Term Thesis

Despite occasional hiccups, the fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.

The EIA predicts global demand for the commodity to grow from 340 Bcf per day in 2015 to 485 Bcf per day by 2040. Countries in Asia and in the Middle East – led by China’s transition away from coal – will account for most of this increase.

And it will be the world’s largest gas producer U.S., which will step up to meet this soaring demand. With domestic prices struggling to break the $3 per million Btu threshold, U.S. natural gas companies see a big opportunity in selling cheap U.S. production at higher prices to rest of the world. In fact, more than 50% of the domestic volume growth in the near future will be used for export in the form of liquefied natural gas (LNG). As per Paris-based International Energy Agency (IEA), the United States will vie with Australia and Qatar as the top LNG exporter by 2022.

Apart from the growing use of LNG and booming exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand with price eventually settling well above $3.

The perceived price strength augurs well for natural gas-heavy upstream companies like Rex Energy Corp. , 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) .

Want to Own a Natural Gas Stock Now?

If you are looking for a near term natural gas play, Rice Midstream Partners L.P. 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 Canonsburg, PA, Rice Midstream is a partnership focused on owning, operating and developing dry gas from the Utica and Marcellus producing regions. The midstream operator has an excellent earnings surprise history. It surpassed estimates in three of the last four quarters at an average rate of 35.3%.

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