The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies though the withdrawal was way below average as mild weather conditions restricted heating demand.

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: An Above-Average Draw

Stockpiles held in underground storage in the lower 48 states fell by 68 billion cubic feet (Bcf) for the week ended Mar 3, 2017, above the guidance (of 58 Bcf draw) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. The past week’s decline represents the fifteenth withdrawal of the 2016-2017 winter heating season after stocks hit an all-time high in November.

Following the latest draw, the current storage level – at 2.295 trillion cubic feet (Tcf) – is down 192 Bcf (7.7%) from last year but is 363 Bcf (18.8%) above the five-year average.

A bout of unseasonably mild weather meant that the decrease lagged the 5-year (2012–2016) average shrinkage of 136 Bcf for the reported week but was ahead of last year’s drop of 63 Bcf.

Positive Long-Term Thesis

Heating demand in winter season – which runs from Nov 1 to Mar 31 – is the single most important contributor of natural gas consumption during these months. Therefore, with the latest weather update pointing to below-normal temperatures over the next few days, heating degree days (HDD) will likely improve and drive storage draws. Following this bullish weather outlook, natural gas prices have moved closer to the key psychological level of $3 per MMBtu. 

Moreover, long-term fundamentals for the commodity continue to be bullish 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.

By the onset of summer months, these secular headwinds will start to have a positive impact on natural gas sentiment and price.

The perceived price strength augurs well for natural gas drillers like Rice Energy Inc. (RICE - Free Report) , Chesapeake Energy Corp. (CHK - Free Report) , Southwestern Energy Co. (SWN - Free Report) , Antero Resources Corp. (AR - Free Report) , Cabot Oil & Gas Corp. (COG - Free Report) and EQT Corp. (EQT - Free Report) .