The U.S. Energy Department's weekly inventory release showed a bigger-than-expected increase in natural gas supplies, which had investors concerned and created downward pressure on prices. However, forecasts for warmer weather and the resultant expectations for strong demand helped the commodity stage a recovery.
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 Larger-than-Expected Rise in Storage
Stockpiles held in underground storage in the lower 48 states rose by 106 billion cubic feet (Bcf) for the week ended June 2, 2017, above the guidance (of 100 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.
Worse, the increase was higher than both last year’s build of 68 Bcf and the 5-year (2012–2016) average addition of 94 Bcf for the reported week.
Following past week’s climb, the current storage level – at 2.631 trillion cubic feet (Tcf) – is now 237 Bcf (9.9%) above the five-year average although stocks are 332 Bcf (11.2%) lower than the year-ago figure.
The bearish build in natural gas inventories created immediate selling pressure on the commodity before recovering on the back of supportive weather forecasts that called for summer-like temperatures over the next few days, intensifying cooling demand for the fuel. As a result, natural gas ended Friday at $3.039 per MMBtu – a weekly improvement of 1.3%.
Positive Long-Term Thesis
The demand situation is expected to improve further once warm weather sets in and gas-fired electricity generation for air conditioning need picks up.
In any case, long-term fundamentals for the commodity continue to be supportive on the back of structural imbalances. While domestic natural gas production is expected to rebound this year, the growing use of liquefied natural gas (or LNG), booming exports to Mexico, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output. The resulting effect will ensure natural gas storage keeping pace with the 5-year average in the near future, with deficits piling up later on.
Over the summer, these secular tailwinds are likely to have a positive impact on natural gas sentiment and price.
Which Stocks to bet On
The perceived price strength augurs well for natural gas-heavy upstream companies like Rice Energy Inc. RICE, Chesapeake Energy Corp. CHK, Southwestern Energy Co. SWN, WPX Energy Inc. WPX, Cabot Oil & Gas Corp. COG and EQT Corp. EQT.
However, each of these firms has a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them.
In case you are looking for energy names for your portfolio, one could opt for Canadian Natural Resources Ltd. CNQ. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Calgary, Alberta-based Canadian Natural Resources is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. The 2017 Zacks Consensus Estimate for this company is $1.31, representing some 725% earnings per share growth over 2016. Next year’s average forecast is $2.52, pointing to another 92% growth.
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