Despite Healthy Draw Natural Gas Supplies Still Abundant

The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. Importantly, the storage draw was higher than the benchmark 5-year average withdrawal for the week. However, the commodity’s stockpiles still remain plentiful, thereby pressuring 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

Stockpiles held in underground storage in the lower 48 states fell by 228 billion cubic feet (Bcf) for the week ended Feb 27, 2015, above the guided range (of 222–226 Bcf draw) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill (NYSE:MHFI) Financial Inc. The decrease was also more than the 5-year (2010–2014) average withdrawal of 115 Bcf for the reported week and also exceeded last year’s drop of 144 Bcf.

Despite past week’s healthy withdrawal, the current storage level – at 1.71 trillion cubic feet (Tcf) – is up 492 Bcf (40.4%) from last year though it is 143 Bcf (7.7%) below the five-year average.

Nevertheless, with production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices remain in check, currently around $2.8 per million Btu (MMBtu).

Bearish Pressure on Prices

From a peak of about $13.50 per MMBtu in 2008 to around $2.8 now – sinking in between to a 10-year low of under $2 in 2012 – the plummeting value of natural gas represents a decline of approximately 80% over seven years. In the absence of major production cuts, we do not expect much upside in gas prices in the near term.

Gas-Weighted Companies to Suffer

This translates into limited upside for natural gas-weighted companies. In particular, those with Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like Chesapeake Energy Corporation (NYSE:CHK), Carrizo Oil & Gas Inc (NASDAQ:CRZO), Penn Virginia Corporation (NYSE:PVA), Bonanza Creek Energy Inc (NYSE:BCEI), Southwestern Energy Company (NYSE:SWN), EOG Resources Inc (NYSE:EOG) look to be in the most trouble.

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