The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. Following the bullish inventory news, plus forecasts for colder temperatures ahead, natural gas prices rebounded from their 16-year lows.
Despite the boost, the commodity is still languishing near its lowest level in more than a decade. With production remaining plentiful and expected to outpace demand for most of 2016, the commodity 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 32 billion cubic feet (Bcf) for the week ended Dec 18, 2015, above analyst expectations for a draw of 25 Bcf. However, the decrease was lower than both last year’s drop of 49 Bcf and the 5-year (2010–2014) average shrinkage of 140 Bcf for the reported week.
The past week’s decline represents the fourth successive withdrawal of the 2015-2016 winter heating season after stocks hit an all-time high in November. But the current storage level – at 3.814 trillion cubic feet (Tcf) – is still up 561 Bcf (17.2%) from last year and is 411 Bcf (12.1%) above the five-year average.
Natural Gas Jumps After Supply Data
Following the more-than-expected decrease in storage, gas prices soared 15% for the holiday-shortened week to close at $2.029 per MMBtu on Thursday. The rally was also helped by predictions of strong demand for the heating fuel due to cooler weather forecasts over the next few days.
Still, Prices 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 now, the plummeting value of natural gas represents a decline of around 85% 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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