Natural Gas Supply Keeps Growing

The U.S. Energy Department's weekly inventory release showed a higher-than-expected increase in natural gas supplies, attributable to sagging demand amid robust production.

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.

Stockpiles held in underground storage in the lower 48 states rose by 111 billion cubic feet (Bcf) for the week ended September 23, 2011, above the guidance range (of 99-103 Bcf gain) of the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc (MHP - Analyst Report).

The increase—the twenty-fifth injection in as many weeks—is much larger than both last year's build-up of 73 Bcf and the 5-year (2006–2010) average addition of 71 Bcf for the reported week. The current storage level at 3.312 trillion cubic feet (Tcf) is down 91 Bcf (2.7%) from last year, but has crept up by 5 Bcf (0.2%) over 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 last year, while gas prices during 2010 fell 21%. As a matter of fact, natural gas prices have dropped more than 70% from a peak of about $13.60 per million Btu (MMBtu) to the current level of around $3.80, 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.

However, natural gas demand is currently going through a lean period—with the end of the peak cooling loads for summer and ahead of the winter heating season, coupled with tepid industrial demand in a weak economy.

In fact, natural gas stocks have now exceeded the 5-year average for the first time since the week of April 15. As a result, commodity prices continue to be under pressure against the backdrop of sustained strong production.

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