The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. Despite the headline miss, the report pointed to a tightening market dynamic and boosted the fuel’s price, which added around 1.5% for the week.
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 106 billion cubic feet (Bcf) for the week ended May 11, slightly above the guidance (of 104 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.
Moreover, the third injection of the 2018 refill season was higher than both last year’s build of 64 Bcf and the 5-year (2013–2017) average addition of 87 Bcf for the reported week.
Still, the current storage remains well below benchmarks. At 1.538 trillion cubic feet (Tcf) – natural gas inventories are 501 Bcf (24.6%) under the five-year average and 821 Bcf (34.8%) below the year-ago figure.
Fundamentally speaking, total supply of natural gas averaged around 85.6 Bcf per day, essentially flat on a weekly basis due to steady production. Meanwhile, daily natural gas consumption rose 4% to 57.5 Bcf. The increase in demand was triggered by higher natural gas usage for power generation.
In other words, EIA’s latest commentary points to a tightening supply-demand balance with growing natural gas use for air-conditioning amid flat production. As a result, natural gas prices gained around 1.5% last week to settle at $2.847 per MMBtu on Friday.
Positive Long-Term Thesis
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 Cabot Oil & Gas Corp. (COG - Free Report) , Chesapeake Energy Corp. (CHK - Free Report) , Southwestern Energy Co. (SWN - Free Report) , WPX Energy, Inc. (WPX - Free Report) , Antero Resources Corp. (AR - 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, Comstock Resources, Inc. (CRK - Free Report) may be a good selection. This company has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Comstock Resources is an independent energy exploration and production company engaged in the acquisition, exploration, and development of oil and gas properties. Natural gas output constitutes 95% of its total production. It has a 100% track of outperforming estimates over the last four quarters at an average rate of 48.32%.
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