Natural Gas Falls Even As EIA Confirms Bullish Supply Data

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. However, unfavorable weather forecasts and strength in the commodity’s production, induced a minor 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 58 billion cubic feet (Bcf) for the week ended Sep 22, 2017, below the guidance (of 66 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

While the increase was higher than last year’s addition of 49 Bcf, it was well under the five-year (2012-2016) average injection of 84 Bcf for the reported week. This caused the current storage level – at 3.466 trillion cubic feet (Tcf) – narrow its surplus to the five-year average to 41 Bcf (1.2%), while stocks are still 127 Bcf (3.5%) below the year-ago figure.

Fundamentally speaking, supply remained essentially unchanged on a weekly basis at 80.1 Bcf per day, while daily natural gas consumption increased 4.8% to 74.6 Bcf. The flattish supply could be attributed to stagnant dry natural gas production.

On the demand side, the improvement was triggered by sharply higher power consumption. Interestingly, it was mix of elevated heating and cooling demand that led to a 9% week-over-week gain in power consumption. The eastern half of the country experienced hotter weather but the western part of U.S. saw lower-then-normal temperatures.

Futures End Down Despite Bullish EIA Data

Shrugging off EIA’s latest commentary, natural gas prices edged down 0.5% last week to settle at $3.007 per MMBtu on Friday as investors chose to concentrate on below-normal temperature predictions (translating into easing cooling gas demand) over the first few days of October. Prices were further dented by the continued strength in 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. (NYSE:RICE) , Chesapeake Energy Corp. (NYSE:CHK) , Southwestern Energy Co. (NYSE:SWN) , WPX Energy Inc. (NYSE:WPX) , Cabot Oil & Gas Corp. (NYSE:COG) and EQT Corp. (NYSE:EQT) .

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. (NYSE:WTI) 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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