An Unseasonal Natural Gas Injection - Analyst Blog

By Zacks | December 17, 2012 AAA

The U.S. Energy Department's weekly inventory release showed a surprise increase in natural gas supplies on account of warmer-than-normal temperatures across most of the country. The storage build has also pushed back natural gas stocks above the year-ago level.

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 like Anadarko Petroleum Corp. (APC), Chesapeake Energy (CHK), Encana Corp. (ECA), Devon Energy Corp. (DVN), Nabors Industries (NBR), Patterson-UTI Energy (PTEN), Helmerich & Payne (HP) and Halliburton Company (HAL).

Analysis of the Data

Stockpiles held in underground storage in the lower 48 states edged up by 2 billion cubic feet (Bcf) for the week ended December 7, 2012, contrary to the guided range (of 1-5 Bcf drawdown) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. (MHP).

This bearish and unseasonal weekly storage injection (when stocks are normally expected to decline), has not only overturned the slight deficit over the year-ago period but also expanded the surplus relative to the five-year average benchmark.

As a result of the surprise stock build during the past week, the current storage level - at 3.806 trillion cubic feet (Tcf) - is up 48 Bcf (1.3%) from the last year and 283 Bcf (8.0%) over the five-year average.

A supply glut kept the natural gas prices under pressure during the past year or so, as production from dense rock formations (shale) - through novel techniques of horizontal drilling and hydraulic fracturing - remain robust, thereby overwhelming demand.

In fact, natural gas inventories in underground storage have persistently exceeded the five-year average since late September last year and ended the usual summer stock-building season of April through October at a record 3.923 Tcf (as of October 31, 2012).

However, with the upcoming U.S. winter set to be colder than the unusually warm last one and domestic output likely to drop in 2013 versus 2012 on the back of natural gas players announcing drilling/volume curtailments, we might expect some balancing of the commodity's supply/demand disparity.

This, in turn, could improve the prices and buoy natural gas producers like Ultra Petroleum Corp. (UPL), Talisman Energy Inc. (TLM), Encana and Chesapeake.

Zacks Rank

All the natural gas-associated companies mentioned above are Zacks #3 Rank (Hold) stocks, implying that these are expected to perform in line with the broader U.S. equity market over the next one to three months.

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