Small Supply Additions Drive Boom In Natural Gas Stocks

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. Moreover, the build was well below historical averages for the sixteenth week in a row, which further narrowed the supply overhang. This, together with predictions of above-normal temperatures across the country in the near term – leading to the commodity’s heightened requirement for air conditioning – pushed natural gas futures to near one-year highs.

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: Smaller-than-Expected Injection

Stockpiles held in underground storage in the lower 48 states rose by 11 billion cubic feet (Bcf) for the week ended Aug 19, 2016, well below the guidance (of 18 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

Moreover, the increase was significantly lower than both last year’s build of 63 Bcf and the 5-year (2011–2015) average addition of 66 Bcf for the reported week.

But in spite of past week’s bullish numbers, the current storage level – at 3.350 trillion cubic feet (Tcf) – is still up 275 Bcf (9%) from last year and is sitting 350 Bcf (12%) above the five-year average.

Natural Gas Prices Rally

Natural gas prices ended Friday at $2.871 per MMBtu – 11% higher from last week and the highest weekly percentage gain since Apr 2016 – as successive below-average builds on the back of strong power sector consumption keep on cutting into the year-over-year storage surplus.

Things were further helped by predictions of strong cooling demand with forecasts of warmer temperature across the country over the next few days. Up 23% year-to-date, the commodity has rebounded strongly (by 80%) since hitting 17-year lows of around $1.6 per MMBtu in the first quarter.

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) .

What’s Next?

Significantly lower year-over-year injection figures over the past few weeks have meant that the commodity has been inching closer to the key psychological level of $3 per MMBtu. Moving past the barrier might just support a price breakout in the coming weeks.

With this summer likely to turn out longer and hotter than normal, natural gas demand is expected to pick 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.

What’s more, rig count has been falling consistently and is now languishing at 81 – compared to more than 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.