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Massive Inventories Continue to Weigh on Natural Gas Prices

The U.S. Energy Department's weekly inventory release showed that the increase in natural gas supplies were in line with expectations.

But nearing 2.7 trillion cubic feet (Tcf), it’s still 44% above the 5-year average. Also, mild temperatures across most parts of the country have restricted the commodity’s requirement for power burn. As a result, despite the in-line rise in stocks, natural gas prices stayed flat.

With production remaining plentiful and expected to outpace demand for most of 2016, the commodity is likely to stay depressed for a while.

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: In-Line Injection

Stockpiles held in underground storage in the lower 48 states rose by 56 billion cubic feet (Bcf) for the week ended May 6, 2016, matching the guidance 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 101 Bcf and the 5-year (2011–2015) average addition of 79 Bcf for the reported week.

But in spite of past week’s bullish numbers, the current storage level – at 2.681 trillion cubic feet (Tcf) – is still up 816 Bcf (44%) from last year and is sitting 813 Bcf (44%) above the five-year average.

Natural Gas Prices Barely Moved Last Week

Natural gas prices ended Friday at $2.096 per MMBtu, essentially unchanged from last week as an encouraging inventory report was offset by predictions of mild weather amid lingering oversupply concerns. The commodity, though, has rebounded more than 30% since hitting 17-year lows of around $1.6 per MMBtu in the first quarter.

Prices Remain Depressed on Bearish Fundamentals

Natural gas prices are way off the heights reached some years back. From a peak of about $13.50 per MMBtu in 2008 to just over $2 now, the plummeting value of natural gas represents a decline of 85% over 8 years.

With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices have been held back. What’s more, industrial requirement has been lackluster over the past few years with demand barely rising.

In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete. Also, the past winter – being unseasonably warmer-than-normal – hampered the heating fuel’s demand and keeping inventories at high level.

The price weakness translates into limited upside for natural gas-weighted companies including the likes of Range Resources Corp. RRC, EQT Corp. EQT, Southwestern Energy Co. SWN, Cabot Oil & Gas Corp. COG, Rice Energy Inc. RICE, Cimarex Energy Co. XEC and Antero Resources Corp. AR.

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SOUTHWESTRN ENE (SWN): Free Stock Analysis Report
EQT CORP (EQT): Free Stock Analysis Report
RANGE RESOURCES (RRC): Free Stock Analysis Report
CABOT OIL & GAS (COG): Free Stock Analysis Report
CIMAREX ENERGY (XEC): Free Stock Analysis Report
ANTERO RESOURCE (AR): Free Stock Analysis Report
RICE ENERGY INC (RICE): Free Stock Analysis Report
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