The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. However, the storage withdrawal – the fourth for the winter heating season – was lower than both last year and the five-year average, thereby indicating continued bearishness.
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 like Anadarko Petroleum Corp. (APC), Chesapeake Energy (CHK), Encana Corp. (ECA), Devon Energy Corp. (DVN), Nabors Industries (NBR), Patterson-UTI Energy (PTEN), Helmerich & Payne (HP) and Halliburton Company (HAL).
Analysis of the Data
Stockpiles held in underground storage in the lower 48 states fell by 82 billion cubic feet (Bcf) for the week ended December 14, 2012, higher than the guided range (of 74–78 Bcf drawdown) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Companies Inc. (MHP).
The decrease represents the fourth withdrawal of the 2012-2013 winter heating season after stocks hit an all-time high in early November. However, the draw was lower than both last year’s withdrawal of 100 Bcf and the five-year (2007–2011) average reduction of 144 Bcf for the reported week.
Therefore, in spite of the ‘better-than-expected’ draw during the past week, the current storage level – at 3.724 trillion cubic feet (Tcf) – is up 66 Bcf (1.8%) from the last year and 345 Bcf (10.2%) over the five-year average.
In fact, natural gas inventories in underground storage have persistently exceeded the five-year average since late September last year and ended the usual summer stock-building season of April through October at a record 3.923 Tcf (as of October 31, 2012).
A supply glut kept the natural gas prices under pressure during the past year or so, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remain robust, thereby overwhelming demand.
However, with the upcoming U.S. winter set to be colder than the unusually warm last one and domestic output likely to drop in 2013 versus 2012 on the back of natural gas players announcing drilling/volume curtailments, we might expect some balancing of the commodity’s supply/demand disparity.
This, in turn, could improve the prices and buoy natural gas producers like Ultra Petroleum Corp. (UPL), Talisman Energy Inc. (TLM), Encana and Chesapeake.
Among the natural gas-associated companies mentioned above, Anadarko Petroleum, Chesapeake Energy, Encana, Devon Energy, Nabors Industries, Patterson-UTI Energy and Talisman Energy are all Zacks #3 Rank (Hold) stocks, implying that these are expected to perform in line with the broader U.S. equity market over the next one to three months.
However, Halliburton retains a Zacks #4 Rank, which translates into a short-term Sell rating, while Helmerich & Payne and Ultra Petroleum’s Zacks #2 Rank implies that the companies are likely to outperform the broader U.S. equity market over the next one to three months.
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