The U.S. Energy Department's weekly inventory release showed a smaller-than-expected decrease in natural gas supplies. Moreover, the storage draw was lower than the benchmark 5-year average withdrawal 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 fell by 22 billion cubic feet (Bcf) for the week ended Nov 28, 2014, lower than the guided range (of 39–43 Bcf draw) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. The decrease – the third successive weekly decline – was also lower than both last year’s drop of 141 Bcf and the 5-year (2009–2013) average addition of 50 Bcf for the reported week.
Following past week’s withdrawal, the current storage level – at 3.4 trillion cubic feet (Tcf) – is currently down 227 Bcf (6.2%) from last year and 372 Bcf (9.8%) below the five-year average.
However, 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 remain in check, currently around $3.7 per million Btu (MMBtu).
Bearish Pressure on Prices
From a peak of about $13.50 per million British thermal units (MMBtu) in 2008 to around $3.65 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 73% 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) 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 Ultra Petroleum Corp. (UPL) and Range Resources Corp. (RRC) – looks to be in most trouble.
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