Natural Gas Surplus Narrows On Another Below-Average Build

The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. However, the build was well below historical averages for the 22nd week in a row, which further narrowed the supply overhang. Importantly, the commodity’s demand continues to be healthy with record usage for gas-fired power in a late-summer surge.

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: Larger-than-Expected Injection

Stockpiles held in underground storage in the lower 48 states rose by 80 billion cubic feet (Bcf) for the week ended Sep 30, 2016, above the guidance (of 69 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

However, the increase – second biggest of the 2016 refill season – was still lower than both last year’s build of 96 Bcf and the 5-year (2011–2015) average addition of 95 Bcf for the reported week.

Following past week’s rise, the current storage level – at 3.680 trillion cubic feet (Tcf) – is now up 74 Bcf (2%) from last year and is sitting 205 Bcf (6%) above the five-year average.

Long-Term Thesis Positive

Successive below-average builds with strong power sector consumption has been cutting into the year-over-year storage surplus. In fact, natural gas prices have rebounded strongly (by around 90%) since hitting 17-year lows of around $1.6 per MMBtu in the first quarter. The dramatic recovery helped the commodity breach the key psychological level of $3 per MMBtu recently.

The price strength has translated into major gains for natural gas-weighted companies including the likes of Cimarex Energy Co. (NYSE:XEC) , EQT Corp. (NYSE:EQT) , Southwestern Energy Co. (NYSE:SWN) , Cabot Oil & Gas Corp. (NYSE:COG) , Range Resources Corp. (NYSE:RRC) and Devon Energy Corp. (NYSE:DVN) .

With the late summer turning out longer and hotter than normal, natural gas demand has picked up on the back of elevated power sector consumption due to air-conditioning use. Coupled with the easing production from the major shale plays, natural gas prices are set to rise further.

What’s more, rig count has been falling consistently and is now languishing below 100 – compared to almost 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.

In general, sentiment toward natural gas is likely to become more positive in the near future as speculators bet on a frigid winter to follow the hot summer.

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