Bullish Data, Hot Weather Drives Natural Gas to 8-Month High

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. This, together with predictions of above-normal temperatures across the country in the near term – leading to the commodity’s heightened requirement for air conditioning – pushed natural gas futures to an 8-month high.

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: Smaller-than-Expected Injection

Stockpiles held in underground storage in the lower 48 states rose by 65 billion cubic feet (Bcf) for the week ended June 3, 2016, below the guidance (of 80 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. Moreover, the increase was lower than both last year’s build of 117 Bcf and the 5-year (2011–2015) average addition of 96 Bcf for the reported week.

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But in spite of past week’s bullish numbers, the current storage level – at 2.972 trillion cubic feet (Tcf) – is still up 660 Bcf (29%) from last year and is sitting 722 Bcf (32%) above the five-year average.

Natural Gas Prices Rally

Natural gas prices ended Thursday at $2.617 per MMBtu, 6% higher from last closing as an encouraging inventory report was more than offset by predictions of strong cooling demand with forecasts of warmer temperature across the country over the next few days The commodity has rebounded strongly (by more than 60%) since hitting 17-year lows of around $1.6 per MMBtu in the first quarter. This has boosted shares of natural gas companies like Devon Energy Corp. DVN and Range Resources Corp. RRC, which have popped up more than 50% over the past 3 months.

Oils-Energy Sector Price Index

Oils-Energy Sector Price Index

Are Prices Set to Explode?

The phenomenal run up notwithstanding, natural gas prices are way off the heights reached some years back. From a peak of about $13.50 per MMBtu in 2008 to around $2.60 now, the plummeting value of natural gas represents a decline of 80% over 8 years.

However, significantly lower year-over-year injection figures this time has meant that the commodity has now crossed the key psychological level of $2.50 per MMBtu. This might just support a price breakout in the coming weeks.

With production from the major shale plays starting to ease and the commodity’s demand set to increase with the onset of a ‘hot’ summer, natural gas prices will continue to recover. What’s more, rig count has been falling consistently and is now languishing at 82 – compared to more than 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.

The price strength translates into upside for natural gas-weighted companies including the likes of Cimarex Energy Co. XEC, EQT Corp. EQT, Southwestern Energy Co. SWN, Cabot Oil & Gas Corp. COG and Williams Companies Inc. WMB.

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