The U.S. Energy Department's weekly inventory release showed a record decrease in natural gas supplies. The massive, 359 billion cubic feet (Bcf) withdrawal was blamed on strong demand due to freezing temperatures over bulk of the country. The bullish report boosted the heating fuel’s price, which added around 15% 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: Biggest Ever Draw
Stockpiles held in underground storage in the lower 48 states fell by Bcf for the week ended Jan 5, the largest on record and comfortably above the guidance (of 337 Bcf decline) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. Considerably colder-than-normal weather across vast swaths of the United States’ heavily populated regions led to soaring demand and was responsible for the huge pull from storage.
Moreover, the decrease was more than twice the last year’s drop of 136 Bcf and the five-year (2013-2017) average net shrinkage of 169 Bcf for the reported week. Following past week’s massive decline – eighth withdrawal of the 2017-2018 winter heating season – the current storage level now stands at 2.767 trillion cubic feet (Tcf), 382 Bcf (12.1%) under the five-year average and 415 Bcf (5.3%) below the year-ago figure. In fact, stockpiles are now at their lowest level for the concerned week since 2008.
Following EIA’s latest commentary, natural gas prices jumped around 15% last week to settle at $3.20 per MMBtu on Friday -- the highest since the first half of November. Apart from the higher-than-anticipated draw, investors were also betting on the continuation of the frigid cold snap going into the end of January, leading to the heating fuel’s healthy demand.
Positive Long-Term Thesis
Despite occasional hiccups, the fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.
The EIA predicts global demand for the commodity to grow from 340 Bcf per day in 2015 to 485 Bcf per day by 2040. Countries in Asia and in the Middle East – led by China’s transition away from coal – will account for most of this increase.
And it will be the world’s largest gas producer U.S., which will step up to meet this soaring demand. With domestic prices struggling to break the $3 per million Btu threshold, U.S. natural gas companies see a big opportunity in selling cheap U.S. production at higher prices to rest of the world. In fact, more than 50% of the domestic volume growth in the near future will be used for export in the form of liquefied natural gas (LNG). As per Paris-based International Energy Agency (IEA), the United States will vie with Australia and Qatar as the top LNG exporter by 2022.
Apart from the growing use of LNG and booming exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand with price eventually settling well above $3.
The perceived price strength augurs well for natural gas-heavy upstream companies like Rex Energy Corporation REXX, Chesapeake Energy Corporation CHK, Southwestern Energy Company SWN, WPX Energy WPX, Antero Resources Corporation AR and EQT Corporation EQT.
Want to Own a Natural Gas Stock Now?
If you are looking for a near term natural gas play, Cabot Oil & Gas Corporation COG may be a good selection. This company actually has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Houston, TX, Cabot Oil & Gas is an energy exploration company with producing properties mainly in the continental U.S. Cabot focuses on high-impact natural gas-focused drilling in the Marcellus Shale in Pennsylvania. The upstream operator’s expected EPS growth rate for three to five years currently stands at 30%, comparing favorably with the industry's growth rate of 20.1%.
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Southwestern Energy Company (SWN) : Free Stock Analysis Report
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