Natural Gas Builds, but Slowly

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected build-up in natural gas supplies on the back of increased cooling demand spurred by an extremely hot weather.

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 activity 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.

Stockpiles held in underground storage in the lower 48 states rose by 25 billion cubic feet (Bcf) for the week ended August 5, 2011, lower than the guidance range (of 34–38 Bcf gain) of the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc.

The increase—the eighteenth injection in as many weeks—is smaller than both last year's build-up of 36 Bcf and the 5-year (2006–2010) average addition of 37 Bcf for the reported week. The current storage level at 2.783 trillion cubic feet (Tcf) is down 197 Bcf (6.6%) from last year and is 80 Bcf (2.8%) below the five-year average.

A supply glut had pressured natural gas futures for most of 2010, as production from dense rock formations (shale)—through novel techniques of horizontal drilling and hydraulic fracturing—remained robust, thereby overwhelming demand.

Storage amounts hit a record high of 3.840 Tcf in November, while gas prices during the year fell 21%. As a matter of fact, natural gas prices have dropped nearly 70% from a peak of about $13.60 per million Btu (MMBtu) to the current level of around $4.10, in between sinking to a low of $2.50 in September 2009.

However, stocks of the commodity slid approximately 2.261 Tcf during the five-month period (November 5, 2010 to April 1, 2011) on the back of a colder-than-normal end to this past winter, production freeze-offs in January/February, and the steadily declining rig count.

These factors cut into the U.S. supply overhang, thereby creating a deficit in natural gas inventories after erasing the hefty surplus over last year's inventory level and the five-year average level.

But with the end of the peak in heating demand for winter, natural gas prices continue to be under pressure against the backdrop of sustained strong production. Producers are now hoping that the gap between supply and demand will further narrow in the coming months as they bet on a hotter-than-expected summer and an active hurricane season.

Zacks Equity Research

For more information on natural gas-weighted companies, check out the full article.