The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies – the season’s first withdrawal. Despite the bullish inventory news, natural gas prices fell on weather-related concerns.
As it is, the commodity is still averaging less than half of what it did some five to six years back. With production remaining plentiful and expected to outpace demand for most of 2015, natural gas is likely to stay depressed for a while.
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 53 billion cubic feet (Bcf) for the week ended Nov 27, 2015, above the guided range (of 46–50 Bcf draw) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. The decrease was also higher than both last year’s drop of 42 Bcf and the 5-year (2010–2014) average shrinkage of 48 Bcf for the reported week.
The past week’s decline represents the first withdrawal of the 2015-2016 winter heating season after stocks hit an all-time high in the previous week. But the current storage level – at 3.956 trillion cubic feet (Tcf) – is still up 543 Bcf (15.9%) from last year and is 247 Bcf (6.7%) above the five-year average.
Natural Gas Falls Despite Encouraging Supply Data
Notwithstanding the more-than-expected decrease in storage, gas prices skidded 1.2% for the week to close at $2.186 per MMBtu on Friday in a selloff spurred mainly by predictions of tepid early-December demand for the heating fuel due to mild weather.
Prices Likely to Remain Depressed
Natural gas prices are way off the heights reached some years back. From a peak of about $13.50 per MMBtu in 2008 to around $2.20 now – sinking in between to a 10-year low of under $2 in 2012 – the plummeting value of natural gas represents a decline of around 80% over seven years.
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 have been held back.
Industrial requirement has been lackluster over the past few years with demand barely rising. What’s more, natural gas demand by residential and commercial users has been weaker-than-expected over the past few weeks due to soft temperatures.
In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete.
The price weakness translates into limited upside for natural gas-weighted companies including the likes of Range Resources Corp. RRC, Southwestern Energy Co. SWN, Cabot Oil & Gas Corp. COG, Rice Energy Inc. RICE, Cimarex Energy Co. XEC and Eclipse Resources Corp. ECR. Each of them carry a Zacks Rank #3 (Hold), which means that investors should rather wait for a better entry point before accumulating shares of these companies.
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