(BBG) Another Strong Natural Gas Storage Build

The U.S. Energy Department’s weekly inventory release showed a larger-than-expected rise in natural gas supplies – the third in as many weeks – on account of milder-than-seasonal weather. Moreover, on a further bearish note, the build was well ahead of the five-year average levels, thereby narrowing the deficit with the benchmark.

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 99 billion cubic feet (Bcf) for the week ended May 10, 2013, higher than the guided range (of 93–97 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI). The increase – the fifth injection of 2013 – also exceeded both last year’s build of 56 Bcf and the 5-year (2008–2012) average addition of 83 Bcf for the reported week.

Despite past week’s build, the current storage level – at 1.964 trillion cubic feet (Tcf) – is down 694 Bcf (26.1%) from the last year and is 83 Bcf (4.1%) below the benchmark five-year average.

Natural gas stocks hit an all-time high of 3.929 Tcf last year, 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 have started to look up in recent times. 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 has now gone, thereby driving commodity prices to $4.38 per MMBtu – the highest since Sep 2011.

This, in turn, is expected to buoy natural gas producers, particularly smaller players like Bill Barrett Corp. (BBG), Linn Energy LLC (LINE) and Forest Oil Corp. (FST). With the financial incentive to produce the commodity and the subsequent improvement in the companies’ ability to generate positive earnings surprises, they are likely to move higher from their current Zacks Rank #3 (Hold).

But natural gas demand is currently going through a lean period – with the end of the winter heating season and ahead of the peak cooling loads for summer. Therefore, until hot summer weather prevails across the country and increases electricity draws to run air conditioners, the commodity may experience above-average builds, thereby pulling down prices again.

BILL BARRETT CP (BBG): Free Stock Analysis Report

FOREST OIL CORP (FST): Free Stock Analysis Report

LINN ENERGY LLC (LINE): Free Stock Analysis Report

MCGRAW HILL FIN (MHFI): Free Stock Analysis Report

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