The U.S. Energy Department's weekly inventory release showed a larger-than-expected rise in natural gas supplies. Moreover, the storage build was bigger than the benchmark 5-year average gain 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
Stockpiles held in underground storage in the lower 48 states rose by 97 billion cubic feet (Bcf) for the week ended Sep 19, 2014, slightly higher than the guided range (of 92–96 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. The increase – the twenty-fifth successive weekly injection – also exceeded both last year’s build of 82 Bcf and the 5-year (2009–2013) average addition of 79 Bcf for the reported week.
Despite past week’s build, the current storage level – at 2.988 trillion cubic feet (Tcf) – is still down 386 Bcf (11.4%) from last year and 426 Bcf (12.5%) below the five-year average.
But with production from the shale drilling bonanza remaining strong, natural gas prices remain in check, currently below $4 per million Btu (MMBtu).
Bearish Pressure on Prices
With August becoming the eighth consecutive record-breaking month of 2014 in terms of natural gas output, prices continue to suffer. From a peak of about $13.50 per MMBtu in 2008 to around $3.95 now – sinking in between to a 10-year low of under $2 in 2012 – the plummeting value of natural gas represents a decline of over 70% over six 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 exploration and production companies like Chesapeake Energy Corp. (CHK), Cabot Oil & Gas Corp. (COG), Quicksilver Resources Inc. (KWK) and EOG Resources Inc. (EOG).
Gas-focused partnerships like Williams Partners L.P. (WPZ) and ONEOK Partners L.P. (OKS) tend to suffer too, from falling sales for their natural gas liquids (NGL) processing.
In fact, their Zacks Rank #3 (Hold) indicates that investors should wait for a better entry point before accumulating shares. In particular, companies with Zacks Rank #5 (Strong Sell) – such as Range Resources Corp. (RRC) – looks to be in most trouble.
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