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Natural Gas Supply Deficit Grows but Faces Florence Threat

Nilanjan Choudhury
At 2.636 Tcf, current natural gas inventories are 18.4% under the five-year average and 20.1% below the year-ago figure.

The U.S. Energy Department's weekly inventory release showed a marginally smaller-than-expected increase in natural gas supplies. Despite the headline beat and a growing storage deficit, strong production and the expected power loss from Hurricane Florence weighed on the fuel’s price, which ended flat over 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: A Smaller-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 69 billion cubic feet (Bcf) for the week ended Sep 7, just below the guidance (of 70 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. The injection was also lower than both the five-year (2013-2017) average addition of 74 Bcf and last year’s build of 87 Bcf for the reported week.

Per the latest EIA data, the current storage remains well below benchmarks. At 2.636 trillion cubic feet (Tcf), current natural gas inventories are 596 Bcf (18.4%) under the five-year average and 662 Bcf (20.1%) below the year-ago figure.

Fundamentally speaking, total supply of natural gas averaged around 87.8 Bcf per day, essentially unchanged on a weekly basis as the slight increase in production was offset by lower Canadian imports. Meanwhile, daily consumption fell 1.5% to 74.5 Bcf on lower power generation demand, which was partly offset by higher natural gas usage for residential and commercial cooling requirements.

Natural Gas Price Flat

Despite the headline beat, natural gas settled essentially unchanged last week based on Friday’s close of $2.767 per MMBtu. While investors are encouraged by the low inventory levels following strong summer air-conditioning demand, they remain worried over unabated production from the Marcellus and Utica shale regions. In fact, dry gas output in the United States averaged 83.2 Bcf per day over the reporting week, up 14.1% from the year-ago level. Expectations of cool weather and demand loss associated with Hurricane Florence played further spoilsport.

Positive Long-Term Thesis

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 43% from 2015 to 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 as the world’s largest gas producer, the United States has emerged as one of the key players – competing with Russia and Australia among others – to meet this soaring demand. With domestic prices struggling to break the $3 per million Btu threshold, American natural gas companies see a big opportunity in selling cheap U.S. production at attractive enough 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.

New pipelines to Mexico, together with large-scale liquefied gas export facilities like Cheniere Energy, Inc.’s Sabine Pass terminal and Dominion Energy Inc.’s (D) newly constructed Cove Point export plant, have meant that exports out of the U.S. are set for a quantum leap.

As per the Energy Department, gross liquefied natural gas exports are set to average 2.93 Bcf per day in 2018, increasing more than 50% from last year. Apart from surging exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand.

Finally, if the upcoming (2018-2019) winter turns out to be colder-than-normal, the surge in expected demand in the face of relative deficit of natural gas inventory could trigger a large rally in the commodity's price.

Want to Own a Natural Gas Stock Now?

The secular tailwinds mentioned above could see natural gas eventually settle well above the $3 per MMBtu mark before the end of the winter. The perceived price strength augurs well for natural gas-heavy upstream companies like Cabot Oil & Gas Corporation COG, Chesapeake Energy Corporation CHK, Comstock Resources, Inc. CRK, Eclipse Resources Corporation ECR, Gulfport Energy Corporation GPOR and Southwestern Energy Company SWN.

However, if you are looking for a near term natural gas play, SilverBow Resources, Inc. SBOW may be a good selection. This company has a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SilverBow is engaged in the exploration and production of oil and natural gas properties in the Eagle Ford shale located in South Texas. The company’s production consists of 86% natural gas. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 7.5% in the same period.

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