Natural Gas Supplies Continue to Build

The U.S. Energy Department's weekly inventory release showed an in-line rise in natural gas supplies. However, on a bearish note, the storage build was ahead of the benchmark 5-year average gain 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 rose by 65 billion cubic feet (Bcf) for the week ended Sep 6, 2013, within the guided range (of 64–68 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI). But the increase – the twenty-second injection of 2013 –exceeded both last year’s build of 27 Bcf and the 5-year (2008–2012) average addition of 62 Bcf for the reported week.

Following past week’s build, the current storage level – at 3.253 trillion cubic feet (Tcf) – is now 46 Bcf (1.4%) above the 5-year average. However, supplies are still down 172 Bcf (5.0%) from the last year’s level.

Natural gas stocks hit an all-time high of 3.929 Tcf in 2012, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remained robust. In fact, the oversupply of natural gas pushed down prices to a 10-year low of $1.82 per million Btu (MMBtu) during late Apr 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

However, things started to look up in 2013. This year, cold winter weather across most parts of the country boosted natural gas demand for space heating by residential/commercial consumers. This, coupled with flat production volumes, meant that the inventory overhang was gone, thereby driving commodity prices to around $4.40 per MMBtu in Apr – the highest in 21 months.

During the last few weeks, though, natural gas demand has gone through a relatively lean period, as mild weather prevailed over the country, leading to tepid electricity draws to run air conditioners. This has led to a slide in the commodity’s price. In fact, healthy injections over last few weeks, plus strong production have meant that supplies have overturned the deficit over the five-year average.

Outlook

However, with above-normal temperatures expected during the next few weeks, leading to strong power demand, natural gas price may experience another upward curve. This, in turn, is expected to buoy natural gas producers, particularly small ones like Carrizo Oil & Gas Inc. (CRZO).

While big players like Exxon Mobil Corp. (XOM) and Southwestern Energy Co. (SWN) – both Zacks Rank #3 (Hold) stocks – would also benefit from the improved fundamentals, they are large-cap, low-beta entities with slow price action.

As such, we advise investors to accumulate Carrizo shares, which sports a Zacks Rank #1 (Strong Buy). With the financial incentive to produce the commodity and the subsequent improvement in the company’s ability to generate positive earnings surprises, it has the potential to rise significantly from current levels.

Read the Full Research Report on SWNRead the Full Research Report on XOMRead the Full Research Report on MHFIRead the Full Research Report on CRZOZacks Investment Research